Question

*ALL PART OF ONE QUESTION*

Exercise 2:

The Ottawa Barber Shop employs four barbers. One barber, who also serves as the manager, is paid a salary of $3,900 per month. The other barbers are paid $1,900 per month. In addition, each barber is paid a commission of $2 per haircut. Other monthly costs are: store rent $700 plus 60 cents per haircut, depreciation on equipment $500, barber supplies 40 cents per haircut, utilities $300, and advertising $100. The price of a haircut is $10.

Instructions

(a) Determine the variable cost per haircut, the total monthly fixed costs, contribution margin per haircut, and contribution margin ratio.

(b) Compute the break-even point in units and dollars.

Answer 1

(a)

Variable cost per haircut = $2 + $0.60 + $0.40 = $3

Fixed cost = $3,900 + ($1,900 X 3) + $700 + $500 + $300 + $100 = $11,200

Contribution margin per haircut = Price per haircut - Variable cost per haircut

= $10 - $3

= $7

Contribution margin ratio = Contribution margin per haircut / Price per haircut

= $7 / $10

= 70%

(b)

Breakeven point in units = Fixed cost / Contribution margin per unit

= $11,200 / $7

= 1,600 units

Breakeven point in dollars = Fixed cost / Contribution margin ratio

= $11,200 / 70%

= $16,000