QUESTION 1 20 MARKS Cheeky Nails (Pty) Ltd, trading as "Cheeky", provides nail services to clients. There are two different types of services that customers can choose from, the classic service and the extreme service. The classic provides clients with the cut and filing of nails and the paint of the natural nail with gel. Extreme provides clients with a manicure, tips on the nails and paint the nails with gel. To do a classic service from start to finish takes a nail technician 1 hour per customer. The extreme service requires 2.5 times the amount of time for a nail technician. The painting of the nails requires the same quantity of gel for each customer. Tips are bought in packages of 100 tips per package which consist of different sizes for different sized finger nails. One tip is needed per finger, a client thus requires 10 tips to do the extreme service. The cost of the tips is R350 per package of 100 tips. The demand for each type of service has proven to be 450 clients for classic service and 350 for extreme services per month. The company rents a space in their local shopping mall to attract as many walk in clients as possible. Each nail technician has their own work station to work at with all the necessities required to provide their service. For the classic service Cheeky charge the clients R250, and for the extreme service they charge R400. The nail technicians are paid a fixed rate of R55 per hour and they also receive a 10% commission on sales for each customer they assist. The cost of the nail gel used to paint the nails has been calculated as R40 per client for both services, Overheads include nail equipment, electricity and cleaning products for each of the work stations. For the financial year ending February 2019 (FY 2019) overheads amounted to R870 000, while the overheads for the financial year ending February 2020 (FY 2020) amounted to R910 000. The direct labour hours have been identified as the allocation base for these overheads as it is the main driver of the overhead costs listed. Actual direct labour hours for FY 2019 were 15 000 hours and for FY 2020 it increased to 15 800 direct labour hours. The fixed and variable cost remain constant and no increases are expected for the coming financial year. Excluded from the overheads above: The rent of the space in the shopping mall is R35 000 per month. The shop supervisor receives a monthly salary of R12 000 per month. REQUIRED Marks Sub- Total total Calculate the contribution per classic and extreme service provided as well as the average contribution as per the demand per month for the company. Round to two decimals where applicable. 1.1 872 8% 1.2 5 5 1.3 Calculate the breakeven number of customers in total and per service per month. Indicate the level (high or low) of operating leverage for Cheeky and explain why it is regarded as high or low. No calculations are required. Cheeky is experiencing cash flow problems. Three of the seven nail technicians will have to be made redundant due to the economic 2 2 1.4 4% 4% MACC371 - FIRST OPP - 2020 2/10 downturn. This will limit the company's number of available labour hours to 768 hours per month. In order to maximize the company's profit, given the limited number of labour hours, determine the number of classic and extremes services the company should aim to provide. TOTAL MARKS 20
