How Contribution Margin Analysis Helped Andre's Salon

Article excerpt

Andre's offers a wide range of hair, skin, nail and retail services and products. When Andre looked at the salon's operating analysis for 1988 (exhibit 1 on page 112), he couldn't understand why the salon had earned a net profit of only $1,841. He thought the revenue-increasing and cost-cutting measures he had introduced throughout the year had essentially been successful.

To increase revenues, Andre had heavily promoted children's hairstyling and perming. He reasoned that revenue would increase if the number of clients increased. By offering styling services for children, he could increase the number of clients; and by offering perming, he promoted his highest fee service. Andre thought that because the costs of professional suppliers for virtually all the salon's services are insignificant, the highest fee service contributes the most to the recovery of overhead and profit. As a result of Andre's measures, all service department revenues were up compared with 1987 and the ratios of styling (47.5%) and perming (23.1%) to total revenues also were up.

To control expenses, Andre closed on Mondays. He chose Monday because he thought that, after the peack weekend business, demand would be too low to warrant the expense of staying open.

Andre paid the salon's hairstylists a fixed salary. In the salon industry, hairstylists typically are compensated in one of three ways:

1. Salary.

2. Excess of earnings over the rent they pay for their stations.

3. Commissions of up to 60% of service revenue.

Andre employed three hairstylists. He paid each a salary of $13,800--a

EXHIBIT 1

Andre's operating analysis

(Year ended December 31, 1988)

                                               Gross
Department                 Ratio    Sales      Profit   Percent
Client count                         5,946
Cutting                    12.6    $13,110    $13,110    100.0
Styling                    47.5     49,239     49,239    100.0
Shampooing                  2.1      2,196      2,196    100.0
Coloring                    5.7      5,880      5,880    100.0
Perming                    23.1     23,950     23,950    100.0
Professional supply cost    -0-        -0-    (3,234)      -0-
Retail                      5.8      5,998      1,463     24.4
Miscellaneous income         .4        455        455    100.0
Cosmetics                   0.2        180       (44)    (24.4)
Gift certificates           0.2        201       (67)    (33.3)
Tanning                     2.4      2,464      1,861     75.5
Totals                    100.0    $103,673   $94,809     91.5
Operating expenses
Wages and salaries                            $48,623     46.9
Payroll taxes                                   5,049      4.9
Insurance                                       4,692      4.5
Depreciation                                      415      0.4
Supplies                                        2,029      2.0
Finance and legal fees                          3,899      3.8
Promotions                                        201      0.2
Advertising                                    13,135     12.7
Rent                                            5,059      4.9
Maintenance and repair                            187      0.2
Utilities                                       3,987      3.8
Licenses and taxes                                 96      0.1
Outside services                                2,175      2.1
Cash over/short                                    54       .0
Bank charges                                      466      0.4
Dues and subscriptions                             75       .1
Education and training                          1,979      1.9
Travel                                            937      0.9
Total expenses                                $92,968     89.8
Net profit                                    $ 1,841      1. …