Activity-Based Costing and Process Costing

Understand the role of performance measures in an organization

Consider the following scenario:

Andre has asked you to evaluate his business, Andre’s Hair Styling. Andre has five barbers working for him. (Andre is not one of them.) Each barber is paid $9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. Rent and other fixed expenses are $1,750 per month. Hair shampoo used on all clients is $0.40 per client. Assume that the only service performed is the giving of haircuts (including shampoo), the unit price of which is $12. Andre has asked you to find the following information.

• Find the contribution margin per haircut. Assume that the barbers’ compensation is a fixed cost. Show calculations to support your answer.
• Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer.
• What will be the operating income if 20,000 haircuts are performed? Show calculations to support your answer.
• Suppose Andre revises the compensation method. The barbers will receive $4 per hour plus $6 for each haircut. What is the new contribution margin per haircut? What is the annual break-even point (in number of haircuts)? Show calculations to support your answer.