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Homework answers / question archive / You run a nail salon
You run a nail salon. Fixed monthly cost is $5,654.00 for rent and utilities, $5,513.00 is spent in salaries and $1,409.00 in insurance. Also every customer requires approximately $3.00 in supplies. You charge $61.00 on average for each service.
You are considering moving the salon to an upscale neighborhood where the rent and utilities will increase to $10,440.00, salaries to $6,480.00 and insurance to $2,274.00 per month. Cost of supplies will increase to $6.00 per service. However you can now charge $154.00 per service. At what point will you be indifferent between your current location and the new loaction?
Computation of Indifferent Point between your current location and the new loaction:
Let the number of services to be indifferent between current location and the new location = x
For Current Location:
Revenue per services = $61
Variable cost per service = $3
Fixed cost = Rent + Salaries + Insurance
= $5,654+$5,513+$1,409
= $12,576
Profit = Sales - Variable cost - Fixed costs
= 61x - 3x -12,576
For New Location:
Revenue per service = $154
Variable cost per service = $6
Fixed cost = Rent + Salaries + Insurance
= $10,440 + $6,480 + $2,274
= $19,194
Profit = Sales - Variable cost - Fixed costs
= 154x - 6x - 19,194
To be indifferent , profit from both the location must be same
61x - 3x -12,576 = 154x - 6x - 19,194
58x - 12,576 = 148x - 19,194
19,194 - 12,576 = 148x - 58x
6,618 = 90x
x = 6,618/90
x = 73.53 or 74
Hence , indifference point = 74 services
