Question

Ned's New Wave Barber Shop specializes in modern unisex haircuts. The only service available at Ned's is a “20-minute” haircut for which the customer is charged $10.The shop has five (5) barbers. (Ned does not work in the shop and, as owner/entrepreneur, he takes no salary.) Each barber is paid an annual salary of $18,000. All equipment including store fixtures and barbering equipment is leased on an annual basis at $4,500 per year. Building space is leased at the rate of $500 per month (or $6,000 per year). Ned is concerned about the shop’s cost structure and seeks your advice

Make both changes(barbers paid on 50% commission and lease agreement)

What is the new Contribution margin per haircut? What is the new annual break-even point in haircuts?

Answer 1

Contribution margin per hair cut = Service charge per hair cut - Commission per hair cut
New Contribution margin per hair cut = $10 - $5 = $5 per hair cut
New annual break even point in haircuts = Annual Fixed cost / New Contribution margin per hair cut
Annual fixed cost = Lease rental on equipment + Lease rental on building space = $4500 + $6000 = $10,500
New annual break even point in haircuts = $10,500 / $5 = 2100 hair cuts