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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?
Expert Solution
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
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