The Cut Stop Is a Small but Prosperous Hair Cutting

Essay

The Cut Stop is a small but prosperous hair cutting salon. Kathy Harvey, the manager of the salon, has been asked by several clients if she will ever offer other "hair related"
services (e.g., perm, dye, etc). After careful thought, Harvey is considering expanding her offerings. However, in order to do so, she will have to hire one additional stylist at a salary of $26,000 per year. Other expenses will increase as follows: rent by 20%, supplies and utilities by 25%, and miscellaneous expenses by 10%. Her revenues from additional services are likely to be $55,000 for the next year (i.e., 2007). The Cut Stop's income statement for the most recent year is presented below.

Required:
(a) Based on your financial analysis, should Kathy Harvey go ahead with the expansion?
(b) What other factors must Harvey consider before making a final decision?