Final answer:
The correct formula to calculate the Breakeven Point (BEP) in dollars is fixed costs divided by the contribution margin ratio. This formula is critical for businesses like 'The Clip Joint' barber shop to determine the amount of sales needed to cover all costs.
Step-by-step explanation:
When calculating the Breakeven Point (BEP) in dollars, we are essentially trying to find the level of sales that will cover all the firm's costs. The correct formula to use is:
BEP ($) = Fixed Costs / Contribution Margin Ratio
Referring back to the example of 'The Clip Joint' barber shop, we know that total costs are a sum of fixed costs plus variable costs. Fixed costs, as stated in the scenario, are $160 per day. Variable costs depend on the number of barbers hired, at a cost of $80 per barber per day. The contribution margin ratio, which is not provided in the scenario, would be calculated by subtracting variable costs from sales per unit and then dividing by the sales per unit. Using this ratio, we can then apply formula (a) to find the BEP in dollars. This ratio indicates how much of each sales dollar is contributing to covering fixed costs and eventually to profit after breakeven has been achieved.
For instance, if 'The Clip Joint' charges $20 per haircut and the contribution margin ratio is calculated to be 0.5, the breakeven point in dollars would be computed as $160 (fixed costs) divided by 0.5 (contribution margin ratio), which equals $320. This means 'The Clip Joint' must generate $320 in sales to break even.