Planning & Budgeting

Question 1

In cost-volume-profit analysis classification of costs together with the application of managerial accounting analysis are conducted at the planning stage in to identify if a service is financially feasible or not . The contribution margin per haircut is calculated in this respect . A product with a negative contribution should never be produced because the firm will lose money from it irrespective of the number of haircuts . The formula for this figure is the difference between the selling price per haircut and the variable costs per haircut . The only variable cost

in Andre 's case is the hair shampoo costs , because this is the only cost that varies in accordance to the haircuts made . Therefore the contribution per haircut amounts to

Selling Price per haircut 12 .00

Less : Variable Costs

Hair Shampoo cost per haircut 0 .40

Contribution per haircut 11 .60

In this case , Andre haircut service is financially viable and should be conducted in light of a positive contribution per haircut of 11 .60

Question 2

Once Andre knows that the service is feasible , he would then be interested in the number of haircuts necessary to avoid from making a loss . This is normally computed through the break-even point calculation . Its formula is as follows . This figures means that 10 ,345 haircuts should be made per year in to ensure that the operations do not incur a loss

Question 3

With all the information calculated we could also determine the level of profits at envisaged haircuts performed . A profit statement at 20 ,000 haircuts is in fact shown below

Profit Statement at a set level of haircuts

Sales Revenue 12 x 20 ,000 ) 240 ,000

Variable Costs

Shampoo Costs 0 .40 x 20 ,000 ) 8 ,000

Contribution 232 ,000

Fixed Costs

Rent and other fixed expenses 1 ,750 x 12 months ) 21 ,000

Barbers Wages 9 .90 x 40 x 50 x 5 ) 99 ,000 120 ,000

Net Operating Income 112 ,000

The only costs that were multiplied with the number of haircuts made are the sales revenue and variable costs . This is due to the fact that these are the only costs that behave in direct proportion with the haircuts made . Fixed costs remain the same because the haircuts volume does not affect them . Indeed such costs will be the same even if no haircuts are made . From the income statement above , we can note that at 20 ,000 haircuts Andre will be generating a good Net Operating Income of 112 ,000

Question 4

A benefit of cost-volume-profit analysis is that management can examine the effect of costs and volumes on profit . They can thus see the effect of changes in costs behavior on the profitability of the firm . In this respect , we shall examine the effect of the change in the barbers compensation . By introducing a rate per haircut of 6 , the variable costs will now be two , the hair shampoo costs and the variable barbers wage . In this respect the variable costs per...