Ned's New Wave

Ned's New Wave

1. Compute the contribution margin per haircut.  (Contribution margin is revenue minus variable costs.)

Answer: The contribution margin per haircut is $10.

2. Compute the annual break-even point in number of haircuts.  (The break-even point where accounting profit is equal to zero.)

Answer: 

Break-even point: $100500/10 = $10050

3. Last year, Ned's performed 15,000 haircuts. What was the total profit or loss? What was the profit or loss per haircut?  

Answer: 

Total Profit: $15000*10-$100500 = $49500

Profit per haircut: $49500/15000 = $3.3

4. What would total profit and profit per haircut have been at 10% higher volume, i.e., 16,500 haircuts? Why does profitability not change in proportion to volume?

Answer: 

Total Profit: $16500*10-$100500 = $64500

Profit per haircut: $64500 / 16500 = $3.9

Because there is extra expenses on fixtures, equipment, and building space which does not change when volume becomes higher, the profitability won’t change in proportion to volume.

5. Ned is considering making changes in how he pays the barbers and the landlord. The first possibility is to change how the barbers are paid. Rather than receiving a salary, the barbers would instead receive a 50% commission on the sale of each haircut. What is the new contribution margin per haircut?  What other considerations will Ned want to make before implementing this plan?

Answer: 

new contribution margin per haircut: $5

$18000/$5 = 3600

According to the calculation above, I would suggest Net not implement this plan if the number of haircuts is less than 3600. This is because under this number, he will obtain less or equal profit compare to the original business model.

...