Question

Hard Nails and Bright Nails are competing nail salons. Both companies have the same number of customers. Both charge the same price for a manicure. The only difference is that Hard Nails pays its manicurists on a salary basis (i.e., a fixed cost structure) while Bright Nails pays its manicurists on the basis of the number of customers they serve (i.e., a variable cost structure). Both companies currently make the same amount of net income. If sales of both salons increase by an equal amount, Hard Nails
a.will earn a higher profit than Bright Nails
b.will earn a lower profit than Bright Nails
c.will earn the same amount of profit as Bright Nails
d.The answer cannot be determined from the information provided.

Answer 1

Answer:

Option A is correct.

will earn a higher profit than Bright Nails

Explanation:

If sales of both saloons increases by an equal amount then Hard Nails will earn a higher profit than Bright Nails.

• The strategy of Hard Nails is that it is paying it's manicurists on a salary basis i.e it is a fixed cost. If sales increases Hard Nails will not give any extra amount to it's manicurists.
• On the other hand the strategy of Bright Nails is that it is paying it's manicurists on the basis of no. of customers they serve. So, if sales increases then it have to pay more amount to it's manicurists.