Question

In the month of June, Jose Hebert’s Beauty Salon gave 3,900 haircuts, shampoos, and permanents at an average price of $ 40 . During the month, fixed costs were $ 16,800 and variable costs were 75% of sales.

Required:

a. determine the contribution margin in dollars, per unit and as a ratio.
b. Using the contribution margin technique, compute the break-even point in dollars and in units.
c. Compute the margin of safety in dollars and as a ratio

Answer 1

a.

The contribution margin in dollars: $39,000

Contribution Margin per Unit: $10

Contribution Margin ratio: 0.25 (25%)

b.

Break-even point in units: 1,680 haircuts

Break-even point in dollars: $67,200

c.

Margin of safety in dollars: $88,800

Margin of safety ratio: 0.5692 (56.92%)

Step-by-step explanation:

Total Sales = 3,900 x $40 = $156,000

Total variable costs = 75% x $156,000 = $117,000

Variable costs per unit = $117,000/3,900 = $30

a.

The contribution margin in dollars = Total sales – Total variable costs = $156,000 - $117,000 = $39,000

Contribution Margin per Unit = Sales Price – Variable Cost per Unit = $40 - $30 = $10

Contribution Margin ratio = (Sales - Total Variable cost)/Sales = $39,000/$156,000 = 0.25 (25%)

b.

Break-even point in units = Fixed expense/Contribution Margin per Unit = $16,800/$10 = 1,680 haircuts

Break-even point in dollars = Fixed expense/Contribution Margin ratio = $16,800/0.25 = $67,200

c.

Margin of safety in dollars = Current sales – Break-even point in dollars = $156,000 - $67,200 = $88,800

Margin of safety ratio = (Current sales – Break-even point in dollars)/Current sales = $88,800/$156,000 = 0.5692 (56.92%)