Question

Spa Ariana Spa Ariana promotes itself as an upscale spa offering a variety of treatments, including massages, facials, and manicures, performed in a luxurious setting by qualified therapists. The owners of Spa Ariana invested close to $450,000 of their own money three years ago in building and decorating the interior of their new spa (six treatment rooms, relaxation rooms, showers, and waiting area). Located on the main street in a ski resort, the spa has a five-year renewable lease from the building owner. The owners hire a manager to run the spa. The average one-hour treatment is priced at $100. Ariana has the following cost structure: Fixed Cost/Month Variable Cost/Treatment $40 Therapist Supplies/laundry Management Utilities Rent Repairs/upkeep/cleaning Total $ 5,500 1,600 6,000 1,500 $14,600 Assume that all treatments have the same variable cost structure depicted in the table. Required: a. Calculate the number of treatments Spa Ariana must perform each month in order to break even. b. In April, the owners of Ariana expect to perform 550 treatments. Prepare a budget for April assuming 550 treatments are given. c. In April, Spa Ariana performs 530 treatments and incurs the following actual costs. Prepare a performance report for April comparing actual performance to the static budget in part (b) based on 550 treatments. d. Prepare a performance report for April comparing actual performance to a flexible budget based on the actual number of treatments performed in April of 530. Actual Operating Results for April Revenue $53,000 Therapists $21,280 Supplies/laundry 1,795 Management 5,125 Utilities 1,725 Rent 9,710 Repairs/upkeep/cleaning 5,080 $44,715 Actual profit $ 8,285 e. Which of the two performance reports you prepared in parts (c) and (d) best reflect the true performance of the Spa Ariana in April? Explain your reasoning. f. Do the break-even calculation you performed in part (a) and the budgeted and actual prof- its computed in parts (a)(d) accurately capture the true economics of the Ariana Spa? Explain why or why not.

Answer 1

1. Break-even Point = Fixed Cost / Contribution Margin

Contribution Margin = (Revenue – Variable Cost) = $(100 - 57) = $43

Break-even Point = $14,600 / $43 = 339.53 treatment

2.                                                  Budget for April

                                    (Number of treatments = 550)

	Variable Cost($)	Fixed Cost($)	Total($)
Revenue(550 * 100)			55000
Therapist (550 * 40)	22000		(22000)
Supplies/laundry (550 * 4)	2200		(2200)
Management		5500	(5500)
Utilities		1600	(1600)
Rent (550 * 7)	3850	6000	(9850)
Repairs/upkeep/cleaning(550 * 6)	3300	1500	(4800)
Total Cost			(45950)
Budgeted Profit			9050

3. The performance report for April based on a static budget of 550 treatments and actual treatment is 530 :

	Budgeted($)	Actual($)	Variances($)	F / UF
Revenue	55000	53000	(2000)	UF
Therapist	(22000)	(21280)	720	F
Supplies/laundry	(2200)	(1795)	405	F
Management	(5500)	(5125)	375	F
Utilities	(1600)	(1725)	(125)	UF
Rent	(9850)	(9710)	140	F
Repairs/upkeep/cleaning	(4800)	(5080)	(280)	UF
Total Cost	(45950)	(44715)	1235	F
Budgeted Profit	9050	8285	(765)	UF

4. The performance report for April based on a flexible budget of 530 treatments :

	Variable Costs($)	Fixed Costs($)	Flexible Budget($)	Actual($)	Variances($)	F / UF
Revenue			53000	53000	0
Therapist	(21200)	(0)	(21200)	(21280)	(80)	UF
Supplies/laundry	(2120)	(0)	(2120)	(1795)	325	F
Management	(0)	(5500)	(5500)	(5125)	375	F
Utilities	(0)	(1600)	(1600)	(1725)	(125)	UF
Rent	(3710)	(6000)	(9710)	(9710)	0
Repairs/upkeep/cleaning	(3180)	(1500)	(4680)	(5080)	(400)	UF
Total Cost	(30210)	(14600)	(44810)	(44715)	95	F
Budgeted Profit			8190	8285	(95)	F

5. According to me the report prepared in (d) showing the true performance of the Spa Ariana.

Flexible budget is different from static budget. It is a budget that adjusts or flexes with changes in volume or activity. Here the flexible budget showing the costs should be incurred and helping to compare it with actual costs. So it is showing the path to management to review the performance to make a modification or make plans to improve where it needs it.