Spa Ariana promotes itself as an upscale spa offering a variety of treatments, including massages, facials, and manicures, performed in a luxurious setting by qualified therapists. The owners of Spa Ariana invested close to $450,000 of their own money three years ago in building and decorating the interior of their new spa (six treatment rooms, relaxation rooms, showers, and waiting area). Located on the main street in a ski resort, the spa has a five-year renewable lease from the building owner. The owners hire a manager to run the spa.
The average one-hour treatment is priced at $100. Ariana has the following cost structure:
Variable Cost/Treatment
Fixed Cost/Month
Therapist
$40
Supplies/laundry
4
Management
$ 5,500
Utilities
1,600
Rent
7
6,000
Repairs/upkeep/cleaning
6
1,500
Total
$57
$14,600
Assume that all treatments have the same variable cost structure depicted in the table.
Required:
Calculate the number of treatments Spa Ariana must perform each month in order to break even.
In April, the owners of Ariana expect to perform 550 treatments. Prepare a budget for April assuming 550 treatments are given.
In April, Spa Ariana performs 530 treatments and incurs the following actual costs. Prepare a performance report for April comparing actual performance to the static budget in part (b) based on 550 treatments.
Prepare a performance report for April comparing actual performance to a flexible budget based on the actual number of treatments performed in April of 530.
Actual Operating Results for April
Revenue
$53,000
Therapists
$21,280
Supplies/laundry
1,795
Management
5,125
Utilities
1,725
Rent
9,710
Repairs/upkeep/cleaning
5,080
$44,715
Actual profit
$ 8,285
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Which of the two performance reports you prepared in parts (c) and (d) best reflect the true performance of Spa Ariana in April? Explain your reasoning.
Do the break-even calculations you performed in part (a) and the budgeted and actual profits computed in parts (a)–(d) accurately capture the true economics of Spa Ariana? Explain why or why not.
