CARPEM DIEM BEAUTY SALON STUDY CASE Contextualization The Carpe Diem Beauty Salon is a small company located close to an important park in the city of So Paulo. The beauty salon is 15 years in the market, and it was founded by Gabriela, an enthusiast of well-being and the connection between body and soul. The company has eight employees, including one cleaner, one valet parking, one receptionist, two hairdressers, two nail artists (one for manicure-only and one for pedicure-only), and one self-employed dermatologist-beautician. The average annual total sales is R$ 1.000.000,00. The main services offered by Carpe Diem include hair-cutting and coloring combo, manis and pedis, and dermatologic appointments for aesthetic procedures. The beauty market has grown 10% per year in the past 10 years, following a study developed by the Associao Brasileira da Indstria de Higiene Pessoal, Perfumaria e Cosmticos (Abihpec). In February 2020, Abihpec expected that 1,5% of a family budget would be spent in products and services of the sector. After the COVID-19 pandemic and the "do it yourself' trend, beauty salons have adapted themselves to be more than a place to get your hair cut, but also as a place to connect and share well-being experiences. The managerial problem Carpe Diem is considered as a small company following the Brazilian IRS total sales criterion. The company's tax regimen is Simples Nacional; the 6% tax rate is computed inside total sales. Gabriela (or simply Gaby), as many entrepreneurs, does not have formal education on managing companies, but decided to open her business because of her life passion. Nevertheless, Gabriela has always kept a consistent revenue and spending control to make sure that the company would have enough money to pay for all its financial obligations. Table 1 (next page) discloses the average monthly expenditures of Carpe Diem. Table 1. Average monthly expenditures. Expenditures R$(average)/month Water R$ 3.975,40 Rent R$ 12.788,00 Energy R$ 4.225,60 Simples Nacional tax 6% IPTU R$ 2.946,80 Hair coloring products R$ 3.753,00 Cleaning products R$ 1.390,00 Valet parking salary R$ 1.500,00 Cleaner salary R$ 2.500,00 Recepcionist salary R$ 2.000,00 Hairdressers salary 30% of gross sales Nail artist salary (manicure) R$ 10 per mani Nail artist salary (pedicure) R$ 15 per pedi Lately, Gaby has questioned herself if the price she has established for the hair- cutting and coloring combo is adequate. It is the service with the highest volume in the company, but, for some reason, clients are not as loyal as she expected. Many of them takes some time to come back to Carpe Diem, so cash collections are not as steady as she would like to. She Has an intuition that that situation is due to the way she has established the hair-cutting and coloring combo price. In the early years of Carpe Diem, Gaby understood that the hair-cutting and coloring combo should have a single price of R$650,00. It did not matter if the hair length was long, medium, or short, nor the type of coloring service. As a simplifying assumption, consider that hair-cutting and hair coloring are always done together. Back in those days, Gaby thought that was the most adequate way to put a price on the combo because of other hair salons competition do the pricing in the same way. However, she was very much aware that each hair length would consume different amounts of hair products and time. By analyzing the beaty salon's client characteristics, Gaby has noticed that there was room to develop a pattern to evaluate cost consumption per hair length and type of hair service. For instance, short hair can be classified as the hair length up to the neck, medium length is up to 20 cm below the chin, and long hair has more than 20 cm below the chin. Hair service types can be haircut + permanent color, haircut + demipermanent 4 color", or "haircut + bleaching with a free hand painting technique + demipermanent color (also known as balayage). Intuitively, she knew that balayage in longer hair would be costlier that balayage in shorter hair since it would consume more resources such as water, energy, shampoo, bleacher, demipermanent hair color, and hair mask. Table 2 below has the monthly average number of hair combos that Carpe Diem has done in the past six months. Table 2. Monthly number of hair combos per coloring technique and hair length (average of the past six months) Type of hair coloring per hair length Number of combos 14 Haircut + permanent color 8 17 12 Haircut + demipermanent color Short hair Medium hair Long hair Short hair Medium hair Long hair Short hair Medium hair Long hair 10 5 6 Haircut + bleaching with a free hand painting technique + demipermanent color (balayage) 15 20 Gaby decided to talk with the hairdressers to estimate how much time it takes to complete a hair combo considering the hair length and the coloring technique. As she predicted, a more complex hair coloring style and a longer hair would consume more time (check Table 3 below to assess the estimate time length for the nine hair combos). Table 3. Average time spent (in minutes) per coloring technique and hair length Hair coloring technique Hair length Short Medium Long 120 180 240 90 120 180 Haircut + permanent color Haircut + demipermanent color Haircut + bleaching with a free hand painting technique + demipermanent color (balayage) 180 240 360 Regarding some of the expenditures stated in Table 1, Gaby considers their assignment to the hair-cutting and coloring combos can be done in the following manner: i. ii. Water expenditures are assigned only to hair cutting and hair coloring services (consider the water consumption from the other services of the beauty salon as immaterial); Energy is predominantly consumed to hair styling after a hair combo is done. In this sense, 75% of the energy expenditure must be assigned to hair styling, 5% to the beauty salon reception are, 20% to the aesthetic procedures. Consider that the energy consumed by the hairdressers is a variable cost, whereas the remaining value is fixed; Rent, IPTU and cleaning (cleaning products + cleaner salary) expenditures are assigned following the beauty salon's occupation area. The hair cutting and hair coloring services area represents 40% of total squared meters. The beauty salon reception and the aesthetic procedures occupies 20% (of the total area) each. The remaining value represents the administrative area in which Gaby runs the beauty salon. iii. The total cost for the nail artist services is R$ 10,00 per mani, and R$ 15,00 per pedi. Those are the same amounts as the remuneration for the nail artist professionals disclosed on Table 1. It is important to note that each nail artist has her own set of nail polish, nail polish remover etc. which has its cost already included in the price that they charge from Carpe Diem. The selling price for manis and pedis are R$25,00 and R$30,00, respectively. Nowadays, the beauty salon has a sales volume of 500 manis and 300 pedis per month The self-employed dermatologist-beautician pays R$500,00 per week to Carpe Diem to use the beauty salon infrastructure. The aesthetic procedures have no variable costs since those are fully covered by the dermatologist-beautician; nevertheless, the company does not get any variable fee from the aesthetic procedures neither. On the other hand, Carpe Diem will need to pay the 6% Simples Nacional tax rate from the rent paid by the dermatologist-beautician. The aesthetic procedures generate an average revenue of R$13.900,00/month to the dermatologist-beautician. (1) Compute the unit cost for the hair-cutting and coloring combos per hair length and coloring technique following the concepts from the absorption costing system. To assign the manufacturing overhead, consider as the allocation base the time consumed per each hair-cutting and coloring combo. (2) Simulate how much the price of manicure service would be if it had a gross margin (of the net revenue) of 40%. Then, compute the final selling price including the Simples Nacional tax rate (6%, inside the price). (3) The pedicure service price is R$30,00. Carpe Diem is considering starting a customer loyalty program: each 9 pedicures, the next one will be free of charge. Compute how much: (a) this loyalty program will cost to the company. (b) is the selling price for the gets 10 pedis, pays only 9 combo. And (c) is the gross margin for the combo compared to 10 pedicures not included at the combo. Also, highlight the advantages and disadvantages for the customer loyalty program. CARPEM DIEM BEAUTY SALON STUDY CASE Contextualization The Carpe Diem Beauty Salon is a small company located close to an important park in the city of So Paulo. The beauty salon is 15 years in the market, and it was founded by Gabriela, an enthusiast of well-being and the connection between body and soul. The company has eight employees, including one cleaner, one valet parking, one receptionist, two hairdressers, two nail artists (one for manicure-only and one for pedicure-only), and one self-employed dermatologist-beautician. The average annual total sales is R$ 1.000.000,00. The main services offered by Carpe Diem include hair-cutting and coloring combo, manis and pedis, and dermatologic appointments for aesthetic procedures. The beauty market has grown 10% per year in the past 10 years, following a study developed by the Associao Brasileira da Indstria de Higiene Pessoal, Perfumaria e Cosmticos (Abihpec). In February 2020, Abihpec expected that 1,5% of a family budget would be spent in products and services of the sector. After the COVID-19 pandemic and the "do it yourself' trend, beauty salons have adapted themselves to be more than a place to get your hair cut, but also as a place to connect and share well-being experiences. The managerial problem Carpe Diem is considered as a small company following the Brazilian IRS total sales criterion. The company's tax regimen is Simples Nacional; the 6% tax rate is computed inside total sales. Gabriela (or simply Gaby), as many entrepreneurs, does not have formal education on managing companies, but decided to open her business because of her life passion. Nevertheless, Gabriela has always kept a consistent revenue and spending control to make sure that the company would have enough money to pay for all its financial obligations. Table 1 (next page) discloses the average monthly expenditures of Carpe Diem. Table 1. Average monthly expenditures. Expenditures R$(average)/month Water R$ 3.975,40 Rent R$ 12.788,00 Energy R$ 4.225,60 Simples Nacional tax 6% IPTU R$ 2.946,80 Hair coloring products R$ 3.753,00 Cleaning products R$ 1.390,00 Valet parking salary R$ 1.500,00 Cleaner salary R$ 2.500,00 Recepcionist salary R$ 2.000,00 Hairdressers salary 30% of gross sales Nail artist salary (manicure) R$ 10 per mani Nail artist salary (pedicure) R$ 15 per pedi Lately, Gaby has questioned herself if the price she has established for the hair- cutting and coloring combo is adequate. It is the service with the highest volume in the company, but, for some reason, clients are not as loyal as she expected. Many of them takes some time to come back to Carpe Diem, so cash collections are not as steady as she would like to. She Has an intuition that that situation is due to the way she has established the hair-cutting and coloring combo price. In the early years of Carpe Diem, Gaby understood that the hair-cutting and coloring combo should have a single price of R$650,00. It did not matter if the hair length was long, medium, or short, nor the type of coloring service. As a simplifying assumption, consider that hair-cutting and hair coloring are always done together. Back in those days, Gaby thought that was the most adequate way to put a price on the combo because of other hair salons competition do the pricing in the same way. However, she was very much aware that each hair length would consume different amounts of hair products and time. By analyzing the beaty salon's client characteristics, Gaby has noticed that there was room to develop a pattern to evaluate cost consumption per hair length and type of hair service. For instance, short hair can be classified as the hair length up to the neck, medium length is up to 20 cm below the chin, and long hair has more than 20 cm below the chin. Hair service types can be haircut + permanent color, haircut + demipermanent 4 color", or "haircut + bleaching with a free hand painting technique + demipermanent color (also known as balayage). Intuitively, she knew that balayage in longer hair would be costlier that balayage in shorter hair since it would consume more resources such as water, energy, shampoo, bleacher, demipermanent hair color, and hair mask. Table 2 below has the monthly average number of hair combos that Carpe Diem has done in the past six months. Table 2. Monthly number of hair combos per coloring technique and hair length (average of the past six months) Type of hair coloring per hair length Number of combos 14 Haircut + permanent color 8 17 12 Haircut + demipermanent color Short hair Medium hair Long hair Short hair Medium hair Long hair Short hair Medium hair Long hair 10 5 6 Haircut + bleaching with a free hand painting technique + demipermanent color (balayage) 15 20 Gaby decided to talk with the hairdressers to estimate how much time it takes to complete a hair combo considering the hair length and the coloring technique. As she predicted, a more complex hair coloring style and a longer hair would consume more time (check Table 3 below to assess the estimate time length for the nine hair combos). Table 3. Average time spent (in minutes) per coloring technique and hair length Hair coloring technique Hair length Short Medium Long 120 180 240 90 120 180 Haircut + permanent color Haircut + demipermanent color Haircut + bleaching with a free hand painting technique + demipermanent color (balayage) 180 240 360 Regarding some of the expenditures stated in Table 1, Gaby considers their assignment to the hair-cutting and coloring combos can be done in the following manner: i. ii. Water expenditures are assigned only to hair cutting and hair coloring services (consider the water consumption from the other services of the beauty salon as immaterial); Energy is predominantly consumed to hair styling after a hair combo is done. In this sense, 75% of the energy expenditure must be assigned to hair styling, 5% to the beauty salon reception are, 20% to the aesthetic procedures. Consider that the energy consumed by the hairdressers is a variable cost, whereas the remaining value is fixed; Rent, IPTU and cleaning (cleaning products + cleaner salary) expenditures are assigned following the beauty salon's occupation area. The hair cutting and hair coloring services area represents 40% of total squared meters. The beauty salon reception and the aesthetic procedures occupies 20% (of the total area) each. The remaining value represents the administrative area in which Gaby runs the beauty salon. iii. The total cost for the nail artist services is R$ 10,00 per mani, and R$ 15,00 per pedi. Those are the same amounts as the remuneration for the nail artist professionals disclosed on Table 1. It is important to note that each nail artist has her own set of nail polish, nail polish remover etc. which has its cost already included in the price that they charge from Carpe Diem. The selling price for manis and pedis are R$25,00 and R$30,00, respectively. Nowadays, the beauty salon has a sales volume of 500 manis and 300 pedis per month The self-employed dermatologist-beautician pays R$500,00 per week to Carpe Diem to use the beauty salon infrastructure. The aesthetic procedures have no variable costs since those are fully covered by the dermatologist-beautician; nevertheless, the company does not get any variable fee from the aesthetic procedures neither. On the other hand, Carpe Diem will need to pay the 6% Simples Nacional tax rate from the rent paid by the dermatologist-beautician. The aesthetic procedures generate an average revenue of R$13.900,00/month to the dermatologist-beautician. (1) Compute the unit cost for the hair-cutting and coloring combos per hair length and coloring technique following the concepts from the absorption costing system. To assign the manufacturing overhead, consider as the allocation base the time consumed per each hair-cutting and coloring combo. (2) Simulate how much the price of manicure service would be if it had a gross margin (of the net revenue) of 40%. Then, compute the final selling price including the Simples Nacional tax rate (6%, inside the price). (3) The pedicure service price is R$30,00. Carpe Diem is considering starting a customer loyalty program: each 9 pedicures, the next one will be free of charge. Compute how much: (a) this loyalty program will cost to the company. (b) is the selling price for the gets 10 pedis, pays only 9 combo. And (c) is the gross margin for the combo compared to 10 pedicures not included at the combo. Also, highlight the advantages and disadvantages for the customer loyalty program