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

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

Explain the concept of competitive advantage, There are dissimilar views on... There are dissimilar views on how an organisation can gain competitive advantage, but contemporary research is placing greater emphasis on the resource-based view. Expl

Explain the bird in the hand theory of cash dividends, Explain the bird in ... Explain the bird in the hand theory of cash dividends. The bird in the hand dividends theory state that dividends received now are better than a promise of future dividends.  U

Basic of finance, discuss three approaches to short-term financing discuss three approaches to short-term financing

Financial algebra, can you help me subtract checks and balances in financia... can you help me subtract checks and balances in financial algebra

State the importance of gearing in accounting, state the importance of gear... state the importance of gearing in accounting Gearing is one of the most extensively used terms in accounting. Gearing is the relationship between debt and equitywhich means th

Calculation of variances, a) Distinguish among standard costing and budgeta... a) Distinguish among standard costing and budgetary control.  (b)"Calculation of variances in standard costing is not an end in itself, but a means  to an end" Brief discussion

Working of securities and exchange commission, Working of SEC The SEC s... Working of SEC The SEC supervises the main members in the securities world, including securities brokers and dealers, securities exchanges, investment advisors, and mutual fund

Advanced financial management, Calculate expected dividends Calculate expected dividends

Functional areas of financial management, FUNCTIONAL AREAS OF FINANCIAL MAN... FUNCTIONAL AREAS OF FINANCIAL MANAGEMENT The scope of financial management is all pervasive and covers approximately all the functional areas of an organization. A number of t

Prepare an investment plan proposal, Yanni and Joanna need some investment ... Yanni and Joanna need some investment advice. Joanna has sold $660,000 worth of Woolworths Limited (WOW) shares that she inherited late last financial year. She has $616,000 remain