Income statement and add/drop. Lakespring Retirement Village is home to senior citizens who are fairly independent, but need assistance with basic health care and occasional meals. Jill Thompson, a licensed beautician, works on salary 16 hours a week at Lakespring. Funds at the retirement village have been getting quite tight, due to an increase in the number of Medicaid and other low-income residents. Carl Jones, Lakespring’s administrator, told Ms Thompson that the hair salon might have to be closed. Mr Jones is sympathetic because he knows that it will be inconvenient for many residents to get this service elsewhere, and Ms Thompson’s charges are about all the residents can afford, but he wonders how he can keep any unit open that does not break even. Mr Jones is looking for a way to save the hair salon and has provided you with the following information for your input:

Jill is currently doing an average weekly business of 16 hair cuts, seven permanents, and four brief visits, which take half an hour, an hour, and 15 minutes, respectively. The hair salon is currently allocated rent of $150.00 per month and other upkeep expenses of $45.00 a month. Jill is paid $9 per hour, and she earned $576.00 last month.

a. Prepare a monthly income statement and determine the total contribution margin and total product margin for each service line. Determine net income for the service taken as a whole.

b. How would you advise Mr Jones: Should he close the hair salon? Why or why not?

c. Should Mr Jones try to persuade Jill to drop any service she now offers?

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Hair Cuts Charge per resident Permanents Brief Visits $8.00 $14.00 $4.50 Variable costs per service performed Cleaning/styling/setting products 0.50 3.50 3.00 Variable water expense 0.15 0.25 0.25 Laundry expenses for towels, smocks, etc. 0.10 0.30 0.30