Stoker listened very carefully as he considered his options. Jacobsen was not willing to disclose exactly how much he took home as owner, but he did share that the shop had a good flow of customers all day long, except for early afternoon. He charged $15 for each haircut, regardless of the style of the cut. The only special services he offered were custom cuts (e.g., razoring a pattern in a crew cut), beard trims, and shaves. Custom cuts were rare, and prices were negotiated, while about 5% of customers received either a beard trim or shave. These were $10 each. He split the retail price of any service offered by the shop 50-50 with the barbers. Althoughsome customers just paid the $15 for the cut and didn't tip the barber, many customers likedto "round up"and tipped as much as $5 per cut; Jacobsen figured the barbers made an average tip of about 20% or $3 per cut. Not bad, thought Stoker.

Jacobsen incurred several costs in keeping his shop running.While easy enough to get one's hands aroundand understand, these costscouldn't be ignored.They were large enough to be attentive to, and Jacobsen had to make sure he was generating enough revenues to cover them all."You can't stay in business if you don'tmake a profit,"he said.

Jacobsen'sCosts

Rent: Rent was $5,000 per month.It wasn't cheap to have his barbershop inthe shopping center. But the location did attract enormous foot traffic,and it was important for Jacobsen's local celebrity status and thelegendary nature of his barbershop for it to be there. Equally as important, his customers could get a haircut, then turn right as they left the barbershop and get a cup of coffee at the local coffee shop, or turn left and get an ice-cream cone at the local ice-cream shop. Or they could skip both and spend the day browsing the rest of the stores in the mall.

Electricity: The electric bill had averaged $200 per month over the past year. That covered the lights, as well as air conditioning and heat.

Other utilities: The landlord collected a monthly utility fee from each tenant to pay for water and trash pickup.The utility fee for Doc's Barbershop was $50 permonth.

Barber supplies: Jacobsen had paid $5,000 last year, which he considered a typical year, for all barber supplies, including combs, scissors,electric "buzz cutters,"Barbicide, hair spray, hair gel, shampoo, and so forth.

Cost of furniture and fixtures: This amounted to about $4,000 per year. Jacobsen had purchased four new barber chairs for $3,000 each two years ago. He expected to use them for 10 years. Jacobsen installed a number of leasehold improvements(i.e., new counters and cabinets) three years ago for $20,000. He expected to use them for 10 years. Jacobsen purchased 10 guest chairs for $400 each at the same time he purchased the new barber chairs. He expected to use them for five years.

Payment to barbers: Each barber received half of the price charged for each haircut, trim, or shave (i.e., for each haircut at a price of $15, the barber received payment of$7.50).This structure gaveJacobsensomecomfort,becauseifabarberdidn't cut hair, Jacobsen didn't have to pay him anything. Each barberwas treated as an independent contractor.

Customer traffic: Jacobsen estimated that the shop served approximately 58 customers per day, or each barber served about 2 customers per hour. Approximately 5% of customers ordered a beard trim or shave, in addition to a haircut.

Barber hours: Barbers would typically work 10-hour days, five days a week. One barber was part-time and only worked three days per week. Each barber usually took a couple of weeks off for vacation each year. The shop was only closed on Sunday.

Questions

Stoker had many questions, and Jacobsen was happy to provide answers. He was proud of his career as a barber and small business owner, proud of his local celebrity status, and proud that he had been successful in the profession. Jacobsen made a mental note of the questions that Stoker asked and promised him a tutorial with answers if he wanted to schedule a time to come visit his shop.

2. First show how you would begin the contribution annual income statement- projected for Doc's Barbershop.
4. Ignoring trims and shaves, how many haircuts does Jacobsen need to provide in a year to break even? How would his answer change assuming the usual proportion of trims and shaves?
6. How many regular customers would Jacobsen need to break even?
8. What about the barber?How attractive was this for him? Suppose one of the barbers told Jacobsen he must be able to make $20,000 per year to keep doing this. How many haircuts would that barber have to give to make his goal?
10. What happens if the land lord springs a rent increase onJacobsen? Suppose the land lord told him that the rent was increasing to $5,500 per month. How many more haircuts would Jacobsen have to give to cover that rent increase?
12. Alternatively, suppose Jacobsen didn't think he could get alot of new customers. How much would he have to increase the price of each haircut to cover that increase in rent?