To: Andre
From: Financial Consultant
Subject: Financial Advice
After analysis of possible business approaches for your barbershop, certain conclusions have been observed:
If the barbers’ salaries are kept as a fixed cost, there is a higher contribution margin of $9.86 compared to $4.43, which is available when the salaries are paid on commission.
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When the barbers’ salaries are a fixed cost, there is a lower breakeven value of 4146 units as opposed to 33634 units when salaries are based on commission.
It is based on these results, as outlined in the calculation below, that it is recommended to maintain the barbers at a fixed cost.
Andre’s Barber
Simulation 1: Barbers as fixed cost
Contribution margin formula
The contribution margin shows the net profit each item brings a company from its sale. It is given by:
Contribution margin per haircut = (Sale – cost of goods sold)/number of haircuts
= (240000 – 2400 – 21000 – 19800)/20000
= $9.86
Compensation as fixed cost
A fixed cost is a cost to the business that remains constant regardless of the services produced. In this case, the compensation of barbers is a fixed cost because it remains constant year in, year out.
Cost of barbers per year = 9.9*40*50
= $ 19,800
Operating income
Operating income = revenue – COGS
= 240000 – 2400 – 21000 – 19800
= $ 196,800
Break-even point
Break-even = fixed cost/ contribution margin
= 40800/ 9.86
= 4137.9 units
Name of cost |
Amount |
| Barbers |
$19,800.0 |
| Fixed expenses |
$21,000.0 |
| Shampoo |
$2,400.0 |
| Revenue |
$240,000.0 |
| Contribution margin |
$9.84 |
| Fixed Cost |
$40,800.00 |
| Variable cost |
$0.12 |
| Sales per unit |
$12.00 |
| Unit Increments |
500 |
| Break-even units |
4146 |
| Break-even $ |
$49,756 |
Simulation 2
Contribution margin per haircut = (Sale – cost of goods sold)/number of haircuts
= (240000 – 2400 – 21000 – 128000)/20000
= $4.43
Name of cost |
Amount |
| Barbers |
$128,000.0 |
| Fixed expenses |
$21,000.0 |
| Shampoo |
$2,400.0 |
| Revenue |
$240,000.0 |
| Contribution margin |
$4.43 |
| Fixed Cost |
$149,000.00 |
| Variable cost |
$0.12 |
| Sales per unit |
$12.00 |
| Unit Increments |
500 |
| Break-even units |
33634 |
| Break-even $ |
$403,612 |
