Add or Drop Analysis, Financial Management

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: 11/30/2012 5:09:02 PM | Location : United States







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
Related Questions
Several overseas factors are subsidiaries of UK banks or their agents who offer facilities to companies with export credit sales usually of above £0.25m. Overseas factors carry out

Q. Show Limitations of Profit maximization? The Profit maximization criterion is criticized on the following grounds: i) Quality of Benefits: Profit maximization approach ig

Government intervention The government might look for intervene in the take-over bid because of fears that the market share of the combined group would constitute a monopoly wh

Explain about the debt policy Designing debt policy the debt policy of a firm is significantly influenced by the cost consideration. In designing financing policy, that is, p

How would you judge the potential profit of Bajaj Electronics on the first year of sales to Booth Plastics and give your views to increase the profit.

Enumerate the Internal development of any business or 'organic growth' Business grows using its own internal resources. - Reduces risk of the high cost of integrating cultur

What remains of an organization revenue after all expenses and taxes have been paid.

Corporate Reorganisations This topic deals principally with mergers and takeovers. It's very highly examinable. The discussion areas overlap with business strategy paper so don

ABC Ltd. Produces electronic components with a selling price per of Rs.100. Fixed cost amount to Rs.2,00,000/- 5000 units are produced and sold each year. Annua

What is Estimation of Current Assets? Please provide me report on Estimation of Current Assets. It is about 2000 words count report on topic Estimation of Current Assets.