Reconsider Andre\'s Hair Styling operation (study problem 2-44), with some diffe
ID: 2453127 • Letter: R
Question
Reconsider Andre's Hair Styling operation (study problem 2-44), with some different facts. Assume that in 2014, Andre's barbers did 23,000 haircuts. He charged customers $17.00 per haircut, paid six barbers a salary of $53,000 each, and had miscellaneous fixed costs of $15,000. Andre is considering changing the way he pays his barbers in 2015. He is considering paying each barber a salary of $21,000 plus $9.01 for each haircut s/he gives. He will continue to charge customers $17.00 per haircut, but miscellaneous fixed costs will increase to $17,000. Andre is sure that if he continues paying his barbers as he has, the number of haircuts in 2015 will be the same as in 2014. However, he thinks that the new payment system would affect the number of haircuts given in 2015. How many haircuts must his barbers give in 2015 in order for Andre to be indifferent between the old and new payment plans?Explanation / Answer
Andre willl be indifferent between the old and new payment plans when total cost or the total profit will be equal under both the methods
Case 1: Old Payment Plan:
revenue = 23,000* 17
= $ 391,000
Cost = $ (53,000*6) + $ 15,000
= $ 333,000
Profit = $ (391,000-333,000)
= $58,000
Case 2: New Payment Plan
Let total number of haircuts be U.
Revenue = $17*U
Cost = $(21,000*6) + $9.01*U + 17,000
Total Cost = $(143,000 + 9.01 U)
Profit = $17*U- $(143,000 + 9.01 U)
= $ 7.99 U - $ 143,000
To be Indifferent , The Total Profit under both the plans should be equal
Profit Under Old Plan = Profit Under New Plan
$58,000 = $ 7.99 U - $ 143,000
or U = 25,125 haircuts
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