Income statement and add-or-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 eighteen hours a week at Lakespring. Funds at the retirement village have been getting tight due to an increase in the number of Medicaid and other low-income residents. Carl Jones, Lakespring’s administrator, told Thompson that the hair salon might have to be closed. Jones is sympathetic because he knows that it will be inconvenient for many residents to get this service elsewhere, and 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. Jones is looking for a way to save the hair salon and has provided the following information: Jill is currently doing an average weekly business of 19 haircuts, 7 permanents, and 6 brief visits, which take half an hour, an hour, and fifteen minutes, respectively. The hair salon is currently allocated rent of $270 per month and other upkeep expenses of $60 a month. Thompson is paid $14 per hour.

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. Should Jones close the hair salon? Why or why not?

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

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Haircuts Permanents Brief Visits Charge per resident $15.00 $25.00 $10.00 Variable costs per service $2.00 $5.00 $4.50 performed (cleaning, styling, and setting products) Variable water expense $0.25 $0.35 $0.35 Laundry expenses for towels, $0.15 $0.35 $0.40 smocks, etc.