Question

You run a nail salon. Fixed monthly cost is $5,093.00 for rent and utilities, $5,924.00 is spent in salaries and $1,370.00 in insurance. Also every customer requires approximately $4.00 in supplies. You charge $116.00 on average for each service.You are considering moving the salon to an upscale neighborhood where the rent and utilities will increase to $11,944.00, salaries to $6,992.00 and insurance to $2,427.00 per month. Cost of supplies will increase to $8.00 per service. However you can now charge $151.00 per service. At what point will you be indifferent between your current location and the new loaction

Answer 1

Answer:

The indifference point is 290 services.

Explanation:

Current location:

Rent and utilities= $5,093

Salies= $5,924

Insurance= $1,370

Total fixed cost= $12,387

Contribution margin per unit= 116 - 4= $112

New location:

Rent and utilities= $11,944

Salies= $6,992

Insurance= $2,427

Total fixed costs= $21,363

Contribution margin per unit= 151 - 8= $143

First, we need to structure the total income formula (y):

Current location:

y= 112x - 12,387

New location:

y= 143x - 21,363

x= number of services

Now, we equal both formulas and isolate x:

112x - 12,387 = 143x - 21,363

31x =8,976

x=  289.55 = 290 services

The indifference point is 290 services.

Prove:

y= 112*290 - 12,387= $20,093

y= 143*290 - 21,363= $20,107

The difference is due to round up.