WFH4Eva Saloon offers a few services to beautify their customers face. One the services is the Smooth Scrub for their customers. Each customer is charged RM100 per session of scrub. The variable cost for each session is RM20 and the fixed cost per month is RM24,000.

Recently the owner realised that many of their customers has stopped visiting them and moved to a newly opened shop that offers a similar service at the next street. The shop has invested in more sophisticated equipment. The owner believes that by upgrading the shop they would be able to face the competition. The management has decided to upgrade the shop by equipping it with sophisticated equipment as the competitor. The management is then planning to increase the charges per session by 80%. Monthly fixed expenses which include aggressive marketing would increase to RM36,000 and variable expenses per session would be RM30.

i) Calculate the shops break even sales in number of scrub sessions and Ringgit Malaysia (RM) before the shop is upgraded. (3 marks)

ii) Calculate the shops break even sales in number of sessions and RM after the shop is upgraded. (3 marks)

iii) Discuss whether there is any significant difference between your answers in (i) and (ii) and whether it is worthwhile to upgrade the shop. (6 marks)

iii)Assuming last year WFH4Eva Saloon has made 400 scrub sessions. The saloon is expects that scrub sessions will increase to 500 after the shop is ugraded.

(a) Compute the degree of operating leverage (DOL) for last year.

(b) Compute the DOL if the shop is upgraded.

(c) Compare your answers in (iv)(a) and (iv)(b) and explain whether the DOL is improved after upgrade.