Assignment Problem: Ned's New Wave Barber Shop specializes in modern unisex haircuts. The only service available at Ned's is a "20-minute" haircut for which the customer is charged $10.
The shop has five (5) barbers. (Ned does not work in the shop and, as owner/entrepreneur, he takes no salary.) Each barber is paid an annual salary of $18,000. All equipment including store fixtures and barbering equipment is leased on an annual basis at $4,500 per year. Building space is leased at the rate of $500 per month (or $6,000 per year).
Ned is concerned about the shop's cost structure and seeks your advice.4. Ned is considering the following changes to how he pays the barbers and the landlord.
a. Change only how barbers are paid. Instead of receiving a salary, barbers would receive a commission equal to 50% of the selling price of each haircut. What is the new contribution margin per haircut? What is the new annual break-even point in number of haircuts?
b. Change only the building lease agreement so that the landlord receives monthly rent of $100 plus 10% of the revenue per haircut. What is the new contribution margin per haircut? What is the new annual break-even point in number of haircuts?
c. Change both the compensation system for the barbers and the building lease agreement. If both are changed, what is the new contribution margin per haircut? What is the new annual break-even point in number of haircuts?
Evaluate the four cost structures proposed above, i.e., the original cost structure and the three changes in question, which cost structure would you recommend and why? Explain how your recommendation depends on your assumptions. For example:
a. Do you think Ned will be able to implement the changes outlined in question 4? Will the barbers agree to work on commission? Will the landlord agree to accept less fixed rent in exchange for a share of revenue?
b. Do you expect the number of haircuts sold to differ across the four cost structures? If so, what differences would you expect?
c. What are the differences in risk to Ned across the four cost structures?
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