Add or Drop Analysis
Lakespring Retirement Village is home to senior citizens who are fairly independent but need assistance with basic health care and occasional meals. Jill Thompson, a licensed beautician, works on salary 16 hours a week at Lakespring. Funds at the retirement village have been getting tight due to an increase in the number of Medicaid and other low income residents. Carl Jones, Lakespring’s administrator, told Thompson that the hair salon might have to be closed. Jones is sympathetic because he knows that it will be inconvenient for many residents to get this service elsewhere, and Thompson’s charges are about all the residents can afford, but he wonders how he can keep any unit open that does not break even. Jones is looking for a way to save the hair salon and has provided the following information:
Hair Cuts Permanents Brief Visits
Charge per resident $10.00 $20.00 $5.00
Variable cost per service performed
Cleaning/styling/setting products $1.00 $4.00 $3.50
Variable water expense $0.15 $0.25 $0.25
Laundry expenses for towels, smocks etc. $0.10 $0.30 $0.30

Jill is currently doing an average weekly business of 16 hair cuts, 7 permanents, and 4 brief visits, which take half an hour, an hour, and fifteen minutes, respectively. The hair salon is currently allocated rent of $250 per month and other upkeep expenses of $50 a month. Thompson is paid $12 per hour, and she earned $768 last month.
a. Prepare a monthly income statement and determine the total contribution margin and product margin for each service line. Determine net income for the service taken as a whole.
b. How would you advise Jones: should he close the hair salon? Why or why not?
c. Should Jones try to persuade Thompson to drop any service she now offers?
The 75 residents of Lakespring currently spend on average $20 a month each for regular health care services at a local clinic. This expense is subsidized by the retirement village. Jones believes that if the salon is closed, the vacated space may be used to hire a physician to provide these services on site on a contractual basis for 9 months at a time. Chelsea Walden, the physician he is considering for this job, estimates that her fixed cost in providing this service will be $1,000 and she will also incur a cost of $12 per patient per month on a 9-month basis to cover the 75 residents. If she wants to earn $3,000 in profit for the 9-month period and Jones would like to pay her on a per resident per month basis, what would her price be?
d. Given Walden’s price and the corresponding monthly cost to Lakespring, would it be financially beneficial for Jones to shut down the salon and start the clinic, or is the current arrangement a better deal?
e. What decision should Jones make? Provide justifications.

Posted Date: 11/28/2012 6:38:28 PM | Location : United States

Ask an Expert

Related Discussions:- add or drop analysis, Assignment Help, Ask Question on add or drop analysis, Get Answer, Expert's Help, add or drop analysis Discussions

Write discussion on add or drop analysis
Your posts are moderated

Write your message here..

Related Questions

Show the limitations of participation, Limitations of participation: 1... Limitations of participation: 1. Technology and organization today are so complex that specialized work roles are required making it difficult for people to participate succes

How to calculate present value?, Illustration  Vishal Mehta & Co.... Illustration  Vishal Mehta & Co., Mumbai issued 7%, 5-year bond on 31st December 2006. The par value of a bond is Rs. 100. This bond pays interest annually and

COST OF CAPITAL, cost of capital, Financial Management The Nu-Nu Brothers I... cost of capital, Financial Management The Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equ

Cash management and inventory management, I am facing some problems in my a... I am facing some problems in my assignment of Cash Management and Inventory Management. Can anybody suggest me the proper explanation for it?

A-credit, A-Credit is the highest credit grade existing as allotted to a bo... A-Credit is the highest credit grade existing as allotted to a borrower by a lender. Lenders use a credit grading system to make the borrowers eligible. The more the borrower's cre

Fundamentals of structured product engineering, Fundamentals of Structured ... Fundamentals of Structured Product Engineering 1. (a) Let r m denote the m month swap rate (or Libor rate). Subsequently the 3 × n month forward rate f (3 ×n )

Volume of issues of central and state government securities, Volume of Issu... Volume of Issues of Central and State Government Securities The growth of government securities market in India and the investor response to the government bond issues can be k

Define price ceiling make consumers better off, How can a price ceiling mak... How can a price ceiling make consumers better off?  Under what conditions might it make them worse off? If the supply curve is completely inelastic a price ceiling will raise c

Why do we need to learn finance, Why do we need to learn finance The qu... Why do we need to learn finance The questions that you may thinking about right now are "Why do we need to learnfinance?  Shall we not leave it to people who are going to speci

Analysis of financial plans, Part 1: Contingency plan Create contingency pl... Part 1: Contingency plan Create contingency plans for the following scenarios: > One of your highly qualified consultants has given three months notice and is planning to move to a