BREAKEVEN PROBLEMS
a. Breakeven at the Micro Level. Pinkie’s hair styling in West Hollywood has five barbers. (Pinkie is not one of the barbers, he owns the barbershop.) Each barber is paid $20 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 $3,750 per month. Assume that the only service performed is the giving of haircuts, the unit price of which is $25.
- Find the contribution margin per haircut. (Assume the barbers’ compensation is a fixed cost.)
- Determine the annual break-even point, in number of haircuts.
- What is the operating income if 20,000 haircuts are sold.
- Suppose Pinkie revises the compensation method. The barbers will receive $8 per hour plus $12 for each haircut. What is the new contribution margin per haircut? What is the annual break-even volume in number of haircuts?
- Ignore the requirements in 3 and 4 and assume that the barbers cease to be paid by the hour but receive $14 for each haircut. What is the new contribution margin per haircut? The annual break-even point (in number of haircuts)?
- Refer to requirement 5. What would be the operating income if 20,000 haircuts are sold? Compare your answer with the answer in requirement 5.
- Refer to requirement 5. If 20,000 haircuts are sold, at what rate of commission would Pinkie earn the same operating income as he earned in requirement 3?
- Look back at the answers to all of your questions. What would be the best way to compensate your barbers: pure commission, salary and commission, or pure salary. Why? Are there any other ways you might consider compensating the barbers?
b. Breakeven Micro Level. Assume that Tom’s Backhoe Company purchases a new backhoe for $125,000. To finance the backhoe, Tom’s Backhoe Company pays $25,000 down and borrows the balance of $100,000 with a 5 year loan at 0% interest rate. The loan is a level payment loan which means that the sum of the interest and principal (i.e. the total payment) remains the same each month over the term of the loan. Tom wants to earn a 15% return per year on his cash investment ($25,000) in the backhoe.
The backhoe requires $100 of gasoline every eight hours day it operates. The operator of the backhoe is paid $40 per hour including all benefits for every hour he operates the backhoe. Insurance costs $7,200 per year. Maintenance costs are $3,000 for every 120 hours the backhoe operates. A normal month contains 160 hours of operating time. There are eight hours in a work day, five days in a work week, and four weeks in a work month. There are 1920 operating hours per year. In every month of normal operation, 40 hours of maintenance are required, so the maximum number of expected hours the backhoe operates in a month is 120 hours.
Calculate the hourly rate that Tom’s Backhoe Company should charge for the backhoe to break even and show your work. State the hourly rate.
Breakeven at the Macro Level
AECOM Corporation is the largest publicly traded enginering/construction company in California. Please write answers and submit for the following questions: ( Short and clear answer 1-2 sentences)
a. What are AECOM’s fixed costs? What do think comprises those fixed costs?
b. What has been AECOM’s historical contribution margin per project (stated in percentage)?
c. Using the breakeven percentage from b, if AECOM’s average project size is $100 million dollars, how many $100 million projects does AECOM have to sell to break-even?
d. Look at recent press about AECOM. What has the recent press said about AECOM’s attempts to lower fixed costs?
Financial Comparison AECOM and Intel
a. Go onto the internet and find financial information about Intel. ( https://tinyurl.com/y9xt99vw ) Read some information about the Intel business model. There is nothing to turn in.
b. Create two very simple "CE502-like" side by side Income Statements and Balance Sheets for the 2018. You already have AECOM financial information.
EXAMPLE: ( If you are unable to provide the table, just write the amount of the cash, Account receivable, Inventory, etc like in the box below, Then I will make the table.)
c. Please use AECOM's annual revenue divide it by Intel’s annual revenue to create a "normalizing factor." What is the resulting factor?
d. Create a "normalized" Balance Sheet and Income Statement for Intel by multiplying simple financial statements by the factor. ( Same like above)
e. Create a side by side comparison of AECOM and "normalized-INTEL". Turn this in as part of your homework.
f. Submit a 400 word discussion of the two companies comparing elements of the Income Statement and elements of the Balance Sheet. Turn this essay in with your homework.
f. Why are these companies so fundamentally different? Answer this in 200 words.
g. Which company/industry would you prefer to be in? Answer this in 100 words.