add or drop analysis, Financial Management

Assignment Help:
Add or Drop Analysis
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.

Related Discussions:- add or drop analysis

Analysis of financial statements, Turnover has increased 10% since 2009 eve...

Turnover has increased 10% since 2009 even if this is at the expense of a drop in the gross margin earned which has fallen from 35.0% to 32.7% which has resulted in only a marginal

Scope of finance functions, SCOPE OF FINANCE FUNCTIONS The functions of...

SCOPE OF FINANCE FUNCTIONS The functions of Financial Manager can generally be sub-divided into two: The Routine functions and the Managerial Functions. Managerial Finance F

Explain riskiness of portfolios, Why does the riskiness of portfolios have ...

Why does the riskiness of portfolios have to be looked at differently than the riskiness of individual assets? The riskiness of portfolios should be looked at differently as comp

Forward planning and critical path, a) Critical Path: A, B, E and F. Projec...

a) Critical Path: A, B, E and F. Project completed in 11 weeks. Subtract one mark for each error made. Maximum marks can only be awarded if the candidate explicitly indicat

Operating cycle, Uses of operating cycle in business

Uses of operating cycle in business

Straight line depreciation, Alger Corp wants to buy some construction equip...

Alger Corp wants to buy some construction equipment for $50,000, which has a useful life of 4 years with no salvage value. Alger uses straight-line depreciation. Alger has a tax ra

Financial accounting, Briefly explain the accounting concepts which guide t...

Briefly explain the accounting concepts which guide the accountant at the recording stage.

Explain the term- administration of decisions, Explain the term- administra...

Explain the term- administration of decisions Conformance, compliance and efficiency This is focussed on the "administration of decisions" . Processes and procedures m

On-the-run treasury issues, On-the-run treasury issues are the most r...

On-the-run treasury issues are the most recently auctioned issues of a given maturity. They include Treasury bills of 3-month, 6-month and 1-year maturity;  treas

Working capital financing plan for company implementation, What is the most...

What is the most conservative type of working capital financing plan a company could implement?  Explain. An all equity capital structure would be the mainly conservative type

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd