Ned's New Wave Barber Shop specializes in modern unisex haircuts. The only service available at Ned's is a 20-minute haircut for which the customer is charged $10. The shop has five (5) barbers. (Ned does not work in the shop. And, as owner/entrepreneur, he takes no salary.) Each barber is paid an annual salary of $18,000. All equipment including store fixtures and barbering equipment is leased on an annual basis at $4,500 per year. Building space is leased at the rate of $500 per month (or $6,000 per year). Ned is concerned about the shops cost structure and seeks your advice.

Case Questions:

Original Cost Structure:

i. Prepare the Contribution Margin Statement for Neds New Wave Barber shop assuming 15,000 haircuts, 16,500 haircuts and 13,500 haircuts per year

ii. What is the breakeven number of haircuts?

iii. What is the degree of operating leverage at 15,000 haircuts?

Alternative Scenario:

Scenario A

Instead of paying the five barbers a salary of $18,000 per year, Ned decides to pay them a commission of $5 per haircut.

i. Prepare the Contribution Margin Statement for Neds New Wave Barber shop assuming 15,000 haircuts, 16,500 haircuts and 13,500 haircuts per year

ii. What is the breakeven number of haircuts?

iii. What is the degree of operating leverage at 15,000 haircuts?

Conclusions:

What are the takeaways from Neds New Wave Barber case?