Final answer:
For each $1.00 of sales at Cuts Incorporated, $0.15 is generated in contribution margin. The contribution margin helps in determining how revenues exceed variable costs. Additionally, understanding the average total cost and average variable cost is crucial for financial decisions.
Step-by-step explanation:
The student's question about the contribution margin ratio for Cuts Incorporated hair salon, which is 15%, asks how much contribution margin is generated for each $1.00 of sales. The correct answer is $0.15, which means that for every dollar of sales, the hair salon generates 15 cents in contribution margin. This can be calculated by multiplying the sales amount by the contribution margin ratio, where $1.00 × 15% = $0.15.
Understanding the concept of contribution margin is essential in cost-volume-profit analysis, as it helps determine how much revenue from sales exceeds the variable costs (contributing to cover fixed costs and profit). In-depth knowledge of this is vital for business students or anyone involved in the financial aspects of a company.
Average Cost and Contribution Margin
The total cost of producing a certain number of haircuts at Cuts Incorporated can also be divided to calculate the average total cost and average variable cost. For example, if the total cost of producing 40 haircuts is $320, the average total cost per haircut is $320/40, or $8 per haircut. In contrast, if the variable cost of producing 80 haircuts is $400, the average variable cost per haircut is $400/80, or $5 per haircut. The relationship between average total cost, average variable cost, and quantity of output is key to understanding business operations and financial decisions.