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Q: Business Accounting ( Answered 5 out of 5 stars,   0 Comments )
Subject: Business Accounting
Category: Business and Money > Accounting
Asked by: tra5489-ga
List Price: $30.00
Posted: 21 Mar 2005 18:21 PST
Expires: 20 Apr 2005 19:21 PDT
Question ID: 498331
Andre has asked you to evaluate his business, Andre?s Hair Stylling.
Andre has five barbers working for him. (Andre is not one of them.)
Each barber is paid $9.90 per hour and works a 40-hour week and a
50-week year, regardless of the number of haircuts. Rent and other
fixed expenses are $1,750 per month. Assume that the only service
performed is the giving of haircuts, the unit price of which is $12.
Andre has asked you to find the following information.
Find the contribution margin per haircut. Assume that the barbers?
compensation is a fixed cost. Show calculations to support your

Determine the annual break-even point, in number of haircuts. Support
your answer with an appropriate explanation.

What will be the operating income if 20,000 haircuts are performed?
Show calculations to support your answer.

Suppose Andre revises the compensation method. The barbers will
receive $4 per hour plus $6 for each haircut. What is the new
contribution margin per haircut? What is the annual break-even point
(in number of haircuts? Show calculations to support your answer.
Subject: Re: Business Accounting
Answered By: omnivorous-ga on 22 Mar 2005 04:44 PST
Rated:5 out of 5 stars
Tra5489 ?

To figure Andre?s Hair Styling contribution margin, you start first
with fixed costs:

LABOR: $9.90 * 40 * 50 * 5 barbers = $99,000
OVERHEAD: $1,750 * 12 = $21,000

TOTAL COSTS = $120,000


Now on to breakeven point:

10,000 haircuts * $12 = $120,000

So, the breakeven is 10,000 haircuts.

Note that on a 6-day workweek (312 days), that would be 32 haircuts
per day or about 6.4 per barber.
On a 5-day workweek (260 days), that would be 38.5 haircuts per day or
about 7.7 per barber.

Also note that at breakeven there is no contribution margin ? costs
are only being covered.

It?s also important to note that this is NOT a standard industry
definition.  Normally labor costs would be considered to be variable
costs and you?d add hours of work as the business demands it.  See
this definition of ?contribution margin? from excellent
pages on the Retail Industry:
?Contribution Margin?

However, since THIS PART of your question deals with the barber?s
salaries as fixed costs, both salaries and rent/expenses (overhead)
have to be lumped together.  At least for now, our Variable Costs = 0.



With a volume of 20,000 haircuts, it would produce:

ANNUAL REVENUES = $12 * 20,000 = $240,000

$240,000 - $120,000 = $120,000



CONTRIBUTION PER HAIRCUT = $120,000 / 20,000 haircuts = $6.00 per haircut

CONTRIBUTION MARGIN = % of income per haircut = $6 / $12 = 50%



What?s important in this problem is to show how contribution margin
works.  As noted in that definition above, it?s what is
available to cover fixed costs.

In the New Model, the PER HAIRCUT costs now are no longer in fixed
costs.  The fixed costs are simply $61,000 ? which consists of:
BARBER?S BASE PAY: $4 * 40 * 50 * 5 barbers = $40,000 
OVERHEAD: $1,750 * 12 = $21,000

TOTAL FIXED = $61,000

It?s nice to have a lower total fixed cost, as this is about half of
the previous cost.  But we?ve added a Variable Cost of $6 per haircut
to Andre?s business.  It makes it a little harder to figure out the

Why?  Because at 10,000 haircuts the Fixed Costs are $6.10 per haircut
and his Variable Costs are $6 per haircut ? and he?s losing money:

At 20,000 haircuts, he makes money, though he?s making less:
$240,000 ? ($61,000 + $120,000) = $59,000 or $2.95 per haircut, which
is 24.6% and profit per haircut is less than half what it was



What?s the point to this problem?  It?s that some costs are Fixed and
some are Variable in most businesses.  And that contribution or
contribution margin will depend heavily on revenues or volume.

Breakeven for Andre?s Hair Styling will come when his Fixed
Costs/Haircut are $6 ? because he already has a Variable Cost of
$6/haircut that he?s paying to his employees.  So it?s $61,000 /
haircuts = $6, or 10,167 haircuts.  Actually he?ll make a few dollars
(not even $10) because of some rounding errors in the math:

REVENUES = 10,167 * $12 =  $122,004
FIXED COSTS (FC) = $61,000
VARIABLE COSTS (VC) = 10,167 * $6 = $61,002


So, Andre?s breakeven went up under the new pay scheme.  Now if he?d
only given the barbers $5/haircut, it would have gone down . . .

Google search strategy:
?contribution margin? definition

Best regards,

tra5489-ga rated this answer:5 out of 5 stars

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