Vin Diesel owns the Fredonia Barber Shop. He employs four barbers and pays each a base rate of $1,250 per month. One of the barbers serves as the manager and receives an extra $500 per month. In addition to the base rate, each barber also receives a commission of $4.50 per haircut. Other costs are as follows. Advertising $200 per monthRent $1,100 per monthBarber supplies $0.30 per haircutUtilities $175 per month plus $0.20 per haircutMagazines $25 per monthVin currently charges $10 per haircut. Instructions(a) Determine the variable costs per haircut and the total monthly fixed costs.(a) VC $5(b) Compute the break-even point in units and dollars.(c) Prepare a CVP graph, assuming a maximum of 1,800 haircuts in a month. Use increments of 300 haircuts on the horizontal axis and $3,000 on the vertical axis.(d) Determine net income, assuming 1,600 haircuts are given in a month.

Explanation:

a. Total variable costs:

Commission: $ 4.5

Barber supplies: $ 0.3

Utilities: $0.2

Total variable cost : $ 5 per haircut

Total fixed cost = $ 5000 (base rate to 4 barbers) + $ 500 (Salary to manager) + $ 200 (Advertising) + $ 1,100 (Rent) + $ 175 (Utilities) + $ 25 (Magazine)

= $7,000 per month

b. Break even point (in units) = Fixed cost per month / (Price per hair cut – Variable cost per haircut)

= 7,000 / (10 – 5) = 1400 hair cuts

Break-even point (in dollars) = Fixed cost per month / (contribution margin ratio)

Contribution margin ratio = Contribution margin per haircut / Revenue per haircut

= (10 – 5) / 5 = 50%

Break-even point in dollars = $ 7,000 / 50% = $ 14,000

c.  Attached is the CVP graph

CVP Graph 15000 5000 500 1000 1500 Fixed cost Linear (Fixed cost) Total costs Sales Linear (Total costs).Linear (Sales)

We see from the graph above that the break even point (point where the orange and blue lines meet) is around 1,400 units

d. Net income assuming 1,600 haircuts:

Net income = $10*(1600) – 7000 - $5*(1600)

                    =$ 1,000

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