Joe has been cutting hair in Everyville, USA for the past 40 years. Customers know they will get a reasonably priced haircut in a relaxed atmosphere and continue to support Joe’s shop despite the frequent changes in the hair styling industry.

Joe employs 5 barbers who earn an annual salary of $15,000 each. They work six days per week from 8AM to 6PM. These barbers are known for their ability to listen to customer’s needs and cares and are most meticulous.

Their repeat business results from customers who appreciate this type of customer service. Joe charges $15 for a haircut and expects to perform 7,000 haircuts this year. Monthly rent on the shop totals $2,000 and other supplies are $500 per month.

REQUIRED:

Consider each of the following items independently.

1. Prepare a contribution income statement for Joe based upon the information presented above.

a. What is Joe’s contribution margin per unit?

b. His contribution margin ratio?

c. What is Joe’s breakeven point in haircuts and sales dollars?

2. Joe is considering revising his rental arrangement with his landlord. Under the new lease Joe will pay $600 per month plus $5 per haircut. All other costs will remain the same.

a. Prepare a new contribution income statement for Joe based upon this change.

b. What is Joe’s new contribution margin per unit?

c. His new contribution margin ratio?

d. What is Joe’s breakeven point in haircuts and sales dollars?

e. Should Joe accept this deal?

3. Joe’s grandson thinks the shop should eliminate its current barber compensation plan. Instead, he proposes that a barber receive a 25% commission on each haircut. All other costs will remain the same.

a. What is Joe’s new contribution margin per unit?

b. His new contribution margin ratio?

c. What is Joe’s breakeven point in haircuts and sales dollars?

d. Should Joe implement this change?