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New Wave Hair Salon (A)
Author(s):
Young, David W.
Functional Area(s):
   Management Accounting
   Management Control Systems
   Organizational Behavior
Setting(s):
   For Profit
Difficulty Level: Beginner
Pages: 2
Teaching Note: Available. 
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First Page and the Assignment Questions:

New Wave Hair Salon (A) 

Preparing this budget requires a lot of assumptions, and I’m not even sure that we’re using the right approach. But if the salon is to have something that’s realistic, and if we’re going to survive within the overall corporation, we’ve got to push ahead.

Molly Kitka, manager and senior stylist of New Wave Hair Salon (NWHS), located in Portland Oregon, was commenting on the frustration she felt in trying to prepare the salon’s budget for the upcoming fiscal year. She realized that, although NWHS’s budget process had come a long way in just a few months, much remained to be done, especially in terms of the relationship with the salon’s holding company, New Wave Enterprises (NWE)

BACKGROUND

NWE owned several salons throughout Oregon and Washington. Its strategy was focused on the increasing need of the professional community for stylish hair cuts. NWE provided some central services to its salons, such as information systems support and financial analysis, and it conducted training programs for stylists and assistants. NWE salons distinguished themselves by a strict “no tipping” philosophy. Instead, NWE had developed a compensation policy, described below, in which stylists could earn annual bonuses.

NWHS was established three years ago, and NWE had appointed Ms. Kitka as manager. Under her leadership, the salon had grown. Last year, there were 4 stylists and 2 assistants. The assistants helped the stylists by doing things like washing a client’s hair, removing curlers, and sweeping the floors. Their role was to make the stylists as productive as possible. NWE had recommended that a salon aim for a 2:1 ratio between stylists and assistants.


Assignment

1. Prepare a budget for NWHS for the three visit types. Use the approach suggested by Ms. Kitka at the end of the case, and organize your figures so that she will find them understandable and useful.* 

2.Assuming Ms. Kitka is unhappy with the “bottom line” of this budget, what options are available to change it? Which options seem the most feasible to implement?

3.Assuming the visit volume and mix forecasts are correct, and that the prices per visit type remain in effect for the full year, what problems do you think Ms. Kitka will encounter in implementing this budget? What should she do about those problems?

* Try to set up a spreadsheet to calculate the budget. Make it as formula-driven as possible. This will allow you to easily test assumptions in answering Question 2.