Planning & Budgeting - Essay Example

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 PointAt Breakeven point, the revenue generated from the services will be exactly equal to the cost incurred to provide the service, that is:Revenue = CostHence, 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) = 12,000Number of Haircuts = 1,034.

5 = 1035 approximatelyC. Operating IncomeThe 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 = $112,000D. NewAs per the new calculations, the fixed cost is recalculated as follow:Barbers5Hourly Rate $ 4.00 Hours per week40Weeks per year50Total 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 clientHence,Contribution Margin = SP - VC = 12.00 - 6.40Contribution Margin = $5.60Breakeven haircuts = FC / (SP - VC) = (61,000) / (12 - 6.40)Hence, Breakeven haircuts = 10,893 haircuts (Approximately)PART TWOThe 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.