Question

Profitability Analysis
Assume Strands Salon, a San Diego hair salon, provides cuts, perms, and hairstyling services. Annual fixed costs are $225,000, and variable costs are 45 percent of sales revenue. Last year's revenues totaled $450,000.

(a) Determine its break-even point in sales dollars.
$Answer

(b) Determine last year's margin of safety in sales dollars.
$Answer

(c) Determine the sales dollar volume required for an annual pretax profit of $200,000.

Round your answer to the nearest dollar.
$Answer

Answer 1

Solution

1. BEP in dollars = Fixed Cost / PV Ratio

Fixed Cost = 2,25,000

PV Ratio = Contribution / Sales

Contribution = Sales - Variable Cost

So Contribution = 4,50,000 - 2,02,500

=2,47,500

PV Ratio =2,47,500/ 4,50,000

= 55%

So, BEP in dollars = 2,25,000 / 55%

= 4,09,091

2. Margin of Safety = Actual sales - Break Even Sales

Actual Sales = 4,50,000

Break Even Sales = 4,09,091

So Margin of Safety = 4,50,000 - 4,09,091

= 40,909

3. Required sales to earn desired profit = Profit + Fixed Cost / P V Ratio

Desired profit = 2,00,000

So, Required sales = 2,00,000 + +2,25,000 / 55%

    = 7,72,727