Andre's Hair Stylling employs 5 barbers at $9.90 per hour, 40 hours per week, and 50 weeks per year. The salary rate applies regardless of the number of haircuts performed by the barber. Fixed expenses total $1,750 per month and the cost for shampoo per client is $0.40. The total cost for each hair cut is $12.00. Using this data, I found the following information.
1. Contribution margin is sales revenue less variable costs. It is the amount available to pay for fixed costs and provide any profit after variable costs have been paid. (Wikipedia, 2006) Find the contribution margin per haircut:
Unit sales price - unit variable cost = contribution margin
12.00 Per cut - 0.40/shampoo = contribution margin
$11.60 = contribution margin
2. The break even point is the level of sales at which revenue equals expenses and net income is zero. (Horngren, 2005) A break even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product, as opposed to attempting to modify an existing product instead so it can be made lucrative.
Determine the break even point:
Break-Even Point in Units = Total Fixed Costs / Contribution Margin per Unit
Break-even point in Units = 21,000 rent, yearly + 99,000 salaries, yearly / 11.60
Break even point in Units = 10,345 haircuts
3. Operating income is a measure of a company's earning power from ongoing operations, equal to earnings before deduction of interest payments and income taxes.
The operating income for 20,000 haircuts:
Revenues - variable costs - fixed costs = operating income
20,000 haircuts x $12 = $240,000
$0.40 shampoo x 20,000 = $8,000
$1,750 rent x 12 months = $21,000
50 weeks x (9.90/hour x 40 hours) x 5 barbers = $99,000
$240,000 - $8,000...