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Planning & Budgeting - Essay Example

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Summary
The managers should be aware of the legal requirements on the price they can set for their products. The compliance with these regulations is mandatory. These may include price ceilings (how high the price can be set), or price floors (how low the price can be set)…
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Planning & Budgeting
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Extract of sample "Planning & Budgeting"

PART ONE A. Contribution Margin Number of Barbers 5 Hourly Rate $ 9.90 Hours per week 40 Weeks per year 50 Total Wages $ 99,000.00 Rent and other expense
$ 21,000.00
Fixed Cost (FC)
$120,000.00
Cost of Shampoo used per client
$ 0.40
Variable Cost (VC)
$ 0.40
Selling Price (SP)
$ 12.00
CONTRIBUTION MARGIN = SP - VC
$ 11.60
B. Break even Point
At Breakeven point, the revenue generated from the services will be exactly equal to the cost incurred to provide the service, that is:
Revenue = Cost
Hence,
Revenue = (SP) (Number of Haircuts)
Cost = FC + (VC)(Number of Haircuts)
At Breakeven point,
(SP) (Number of Haircuts) = FC + (VC)(Number of Haircuts)
(12)(Number of Haircuts) = 120,000 + (0.40)(Number of Haircuts)
(11.6)(Number of Haircuts) = 12,000
Number of Haircuts = 1,034.5
= 1035 approximately
C. Operating Income
The operating profit will be given as,
Operating Profit = Revenue - Cost
If 20,000 haircuts are performed in a year, the operating profit is given as:
Operating Profit = (12)(20,000) - (120,000) - (0.40)(20,000)
= 240,000 - 120,000 - 8,000
= $112,000
D. New
As per the new calculations, the fixed cost is recalculated as follow:
Barbers
5
Hourly Rate
$ 4.00
Hours per week
40
Weeks per year
50
Total Wages
$ 40,000.00
Rent and other expense
$ 21,000.00
Fixed Cost (FC)
$ 61,000.00
The Variable Cost (VC) = $6 per haircut + $ 0.40 shampoo per client
= $6.40 per client
Hence,
Contribution Margin = SP - VC
= 12.00 - 6.40
Contribution Margin = $5.60
Breakeven haircuts = FC / (SP - VC)
= (61,000) / (12 - 6.40)
Hence, Breakeven haircuts = 10,893 haircuts (Approximately)
PART TWO
The managers should be aware of the legal requirements on the price they can set for their products. The compliance with these regulations is mandatory. These may include price ceilings (how high the price can be set), or price floors (how low the price can be set). The government makes a limitation on prices to protect the interest of other customers, and economy as a whole.
In addition, other areas of potential price regulations include deceptive pricing ('false or deceptive savings claims, price comparisons, "special" sales, "two-for-one" sales, "factory" prices, or "wholesale"'), price discrimination ('the practice of charging different buyers different prices for the same quantity and quality of products or services'), predatory pricing ('the practice of selectively pricing a product below that of competition so as to eliminate competition, while pricing the product higher in markets where competition does not exist or is relatively weaker'), and price fixing ('the practice of two or more sellers agreeing on the price to charge for similar products or services'). For international markets, the price decisions need to be based as per the regulations in different markets. Read More
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