Marys Big Decision

Our old friend Mary has finally decided to start providing tanning services at her salon. She has been convinced that providing tanning services will add much needed profitability. She is ready to purchase one unit, either a Deluxe Dome Unit, a Basic Dome Unit, or the Tanning Bed. Here is a summary of these alternatives. Please evaluate them and then answer the questions below. You will need to record the answers on the exam in FoxTale.

For the Deluxe Dome Unit, she will be hiring one employee full-time to manage the new services as well as clean and maintain the unit (paid $36,500 per year, including payroll taxes and benefits). For the Basic Dome Unit and the Tanning bed, she will hire an hourly employee to schedule, clean and maintain the unit (paid $17/hour).

Salon hours: Sunday Closed

Monday-Thursday 9 am 8 pm

Friday 9 am 10 pm

Saturday 9 am 2 pm

Depreciation method: Straight line

Tax rate: 35%

Deluxe Dome unit Basic Dome Unit Tanning Bed

Sales price per session $19.50 $16.50 $13.50

Cost $ 68,000 $32,500 $28,500

Installation costs $ 4,000 $ 1,000 $ 500

Electricity (annual) Cost = 2.75x + 10,000 Cost = 0.75x + 9,000 Cost = 0.75x + 6,000 R²= 0.95 R²= 0.65 R²= 0.62

Number of sessions/hour 5 4 4

Number of bulbs needed 10 22 28

Cost per bulb $45 $20 $25

Bulb life 200 hours 1,200 hours 700 hours

Annual insurance $ 1,250 $ 1,000 $ 500

Unit life 7 years 10 years 10 years

Tanning lotion 1 bottle / 10 sessions / $4 per bottle

Other variable costs/session $3.75 $0.50 $1.10

Required:

1. Write out the after-tax profit formula for each of the three units.
2. Find the break-even point (in sessions) for each of the three units.
3. If Mary believes she can sell 6,500 sessions in a year, which unit would be the most profitable at this sales volume? What would be her after-tax profit?
4. How many sessions of the Tanning Bed does Mary need to sell to have an after-tax profit of $24,115?
5. At what point (of sales in units) does the Basic Dome Unit become more profitable than the Tanning Bed?
6. How many sessions does she need to sell for the Deluxe Dome Unit to be the most profitable unit?

Mary's Big Decision Our old friend Mary has finally decided to start providing tanning services at her salon. She has been convinced that providing tanning services will add much needed profitability. She is ready to purchase one unit, either a Deluxe Dome Unit, a Basic Dome Unit, or the Tanning Bed. Here is a summary of these alternatives. Please evaluate them and then answer the questions below. You will need to record the answers on the exam in FoxTale, For the Deluxe Dome Unit, she will be hiring one employee full-time to manage the new services as well as clean and maintain the unit (paid $36,500 per year, including payroll taxes and benefits). For the Basic Dome Unit and the Tanning bed, she will hire an hourly employee to schedule, clean and maintain the unit (paid $17/hour). Salon hours: Sunday Monday-Thursday Friday Saturday Closed 9 am - 8 pm 9 am - 10 pm 9 am - 2 pm Depreciation method: Tax rate: Straight line 35% Sales price per session Cost Installation costs Deluxe Dome unit $19.50 $ 68,000 $ 4,000 Basic Dome Unit $16.50 $32,500 $ 1,000 Tanning Bed $13.50 $28,500 $ 500 Electricity (annual) Cost = 2.75x = 10,000 R = 0.95 Cost = 0.75x + 9,000 R = 0.65 Cost = 0.75x + 6,000 R = 0.62 Number of sessions/hour Number of bulbs needed 10 Cost per bulb $45 Bulb life 200 hours 1,200 hours 700 hours Annual insurance $ 1,250 $1,000 S 500 Unit life 7 years 10 years 10 years Tanning lotion 1 bottle / 10 sessions / $4 per bottle Other variable costs/session $3.75 $0.50 $1.10