Question 1 CASE STUDY (60 MARKS) FELICITY ON GEORGE Felicity Mason runs her own hairdressing salon on George Street Dunedin. She is the only hairdresser in the salon, which is named Felicity on George (FOG). Felicity started her business in 2015 after working in other salons around New Zealand. She wanted to return to her home town and as she says, be in control of her own destiny". Felicity specialises in haircuts and does not undertake other treatments such as colours and perms. She works from 9am to 5pm five days a week, with half an hour for lunch and can do four haircuts in an hour. She has built up a very loyal and regular clientele from staff in local businesses and the University, and this is supplemented by some tourists, especially those off cruise ships. This means that she is typically cutting hair on average for six and half hours per day. The ratio of female to male haircuts is 2:1. Felicity pays herself a small wage but has access to any surplus through drawings. Data for Felicity's business during February 2020 are displayed in Exhibit 1. Exhibit 1 Data as at 28 February 2020 Salon Price/haircut Male Female 80% of female $25 haircut price $1 $2 $7 $8 Average product costs/haircut Labour cost/haircut Regular sharpening (scissors, razors $55 etc) costs/ week Rent per week $270 Electricity per week $80 Accounting cost per annum $1,872 All was going well in Felicity's salon until New Zealand was plunged into a Covid-19 lockdown in late March 2020. Cruise ships and tourists stopped coming to Dunedin and Felicity had to close FOG for the lockdown duration. In June she reopened her salon. No income for nearly three months meant Felicity was pressured to start earning some good money as soon as possible. Patrons were flocking to have their hair cut post-lockdown, and other salons were putting their prices up to take advantage of this surge in activity. Felicity was unsure whether this was a good thing to do. She was certain she could keep the same level of business she had in February if she kept her prices the same as in February. If she increased her prices, she predicts there may be some impact on sales volume as shown in Exhibit 2. Exhibit 2 increased Predicted hair cutting hours/day in July 2020 if price of haircuts are $30 Selling price/female haircut Probable haircutting hours/day Probability of achieving this haircutting level 4.5 0.90 6.5 0.10 During June 2020 Felicity also tried to negotiate a rent reduction of 10% with her landlord. She was successful in obtaining this in the last (fourth) week of July. The actual results for July 2020 are presented below in Exhibit 3. Exhibit 3 Actual results for four working weeks in July 2020 Male $22 $1.20 $7 39 Female $24.50 $2.20 $8 85 Salon Price/haircut Average product costs/haircut Labour cost/haircut Number of haircuts/week Regular sharpening (scissors, razors $65 etc) costs/week Rent per week for first 3 weeks $270 Electricity per week $85 Accounting cost per annum $1,872 Required: (a) Prepare an actual variable costing (contribution margin format) income statement for the 4 weeks ending 28 February 2020. What is FOG's profit before tax for those 4 weeks? (5 marks) (b) What is the breakeven number of haircuts in February in total and for female and male haircuts separately? (4 marks) (c) Assuming the increased haircut selling price, prepare two budgeted variable costing income statements for the month of July 2020 at the two different predicted haircutting levels indicated in Exhibit 2. The July budgeted costs are based on the average costs observed in February. Costs/haircut, weekly costs and sales mix will be the same as in February 2020. Assume a 4-week working month. (10 marks) (d) What is the expected profit before tax if Felicity raises the price of female haircuts to $30/haircut in July 2020? (3 marks) (e) Discuss fully whether Felicity should increase the price of haircuts in July 2020. (7 marks) (f) Felicity decided to use the February 2020 results as her July 2020 budget. Calculate FOG's sales mix, sales quantity and sales volume variances on a contribution margin basis for both male and female clients and in total for the 4-week period of July. (9 marks) (8) Prepare an actual variable costing contribution margin format) income statement for the 4 weeks ending 31 July 2020. What is FOG's profit before tax for those 4 weeks? (5 marks) (h) Compare the budgeted and actual results for FOG for July 2020. Explain fully any similarities and differences. Support your discussion with quantitative analysis. (10 marks) (i) Discuss and evaluate the performance of FOG. What would you suggest Felicity do in the coming months? Why? (7 marks) Question 1 CASE STUDY (60 MARKS) FELICITY ON GEORGE Felicity Mason runs her own hairdressing salon on George Street Dunedin. She is the only hairdresser in the salon, which is named Felicity on George (FOG). Felicity started her business in 2015 after working in other salons around New Zealand. She wanted to return to her home town and as she says, be in control of her own destiny". Felicity specialises in haircuts and does not undertake other treatments such as colours and perms. She works from 9am to 5pm five days a week, with half an hour for lunch and can do four haircuts in an hour. She has built up a very loyal and regular clientele from staff in local businesses and the University, and this is supplemented by some tourists, especially those off cruise ships. This means that she is typically cutting hair on average for six and half hours per day. The ratio of female to male haircuts is 2:1. Felicity pays herself a small wage but has access to any surplus through drawings. Data for Felicity's business during February 2020 are displayed in Exhibit 1. Exhibit 1 Data as at 28 February 2020 Salon Price/haircut Male Female 80% of female $25 haircut price $1 $2 $7 $8 Average product costs/haircut Labour cost/haircut Regular sharpening (scissors, razors $55 etc) costs/ week Rent per week $270 Electricity per week $80 Accounting cost per annum $1,872 All was going well in Felicity's salon until New Zealand was plunged into a Covid-19 lockdown in late March 2020. Cruise ships and tourists stopped coming to Dunedin and Felicity had to close FOG for the lockdown duration. In June she reopened her salon. No income for nearly three months meant Felicity was pressured to start earning some good money as soon as possible. Patrons were flocking to have their hair cut post-lockdown, and other salons were putting their prices up to take advantage of this surge in activity. Felicity was unsure whether this was a good thing to do. She was certain she could keep the same level of business she had in February if she kept her prices the same as in February. If she increased her prices, she predicts there may be some impact on sales volume as shown in Exhibit 2. Exhibit 2 increased Predicted hair cutting hours/day in July 2020 if price of haircuts are $30 Selling price/female haircut Probable haircutting hours/day Probability of achieving this haircutting level 4.5 0.90 6.5 0.10 During June 2020 Felicity also tried to negotiate a rent reduction of 10% with her landlord. She was successful in obtaining this in the last (fourth) week of July. The actual results for July 2020 are presented below in Exhibit 3. Exhibit 3 Actual results for four working weeks in July 2020 Male $22 $1.20 $7 39 Female $24.50 $2.20 $8 85 Salon Price/haircut Average product costs/haircut Labour cost/haircut Number of haircuts/week Regular sharpening (scissors, razors $65 etc) costs/week Rent per week for first 3 weeks $270 Electricity per week $85 Accounting cost per annum $1,872 Required: (a) Prepare an actual variable costing (contribution margin format) income statement for the 4 weeks ending 28 February 2020. What is FOG's profit before tax for those 4 weeks? (5 marks) (b) What is the breakeven number of haircuts in February in total and for female and male haircuts separately? (4 marks) (c) Assuming the increased haircut selling price, prepare two budgeted variable costing income statements for the month of July 2020 at the two different predicted haircutting levels indicated in Exhibit 2. The July budgeted costs are based on the average costs observed in February. Costs/haircut, weekly costs and sales mix will be the same as in February 2020. Assume a 4-week working month. (10 marks) (d) What is the expected profit before tax if Felicity raises the price of female haircuts to $30/haircut in July 2020? (3 marks) (e) Discuss fully whether Felicity should increase the price of haircuts in July 2020. (7 marks) (f) Felicity decided to use the February 2020 results as her July 2020 budget. Calculate FOG's sales mix, sales quantity and sales volume variances on a contribution margin basis for both male and female clients and in total for the 4-week period of July. (9 marks) (8) Prepare an actual variable costing contribution margin format) income statement for the 4 weeks ending 31 July 2020. What is FOG's profit before tax for those 4 weeks? (5 marks) (h) Compare the budgeted and actual results for FOG for July 2020. Explain fully any similarities and differences. Support your discussion with quantitative analysis. (10 marks) (i) Discuss and evaluate the performance of FOG. What would you suggest Felicity do in the coming months? Why? (7 marks)