Question

In the month of June, Jose Hebert’s Beauty Salon gave 3,500 haircuts, shampoos, and permanents at an average price of $30. During the month, fixed costs were $16,500 and variable costs were 75% of sales.

Determine the contribution margin in dollars, per unit and as a ratio. (Round contribution margin per unit and contribution margin ratio to 2 decimal places, e.g. 5.25 & 10.50.)

Contribution margin		$
Contribution margin per unit		$
Contribution margin ratio			%

Using the contribution margin technique, compute the break-even point in dollars and in units. (Round answers to 0 decimal places, e.g. 1,225.)

Break-even point		$
Break-even point			units

Compute the margin of safety in dollars and as a ratio. (Round answers to 0 decimal places, e.g. 1,225.)

Margin of safety		$
Margin of safety ratio

Answer 1

Solution:

Contribution margin	26,250
Contribution margin per unit	7.5
Contribution Margin Ratio	25%

Break-even point	$66,000
Break-even point (in units)	2,200 units

Margin of safety	$39,000
Margin of safety ratio	37.14%

　

Working:

Contribution Margin = Sales - VC = 3500*30 - 3500*22.5 = 26,250

Average price of services : $30

Unit Variable Costs - 75% of sales = $22.50

Total Fixed Costs - $16,500

Number of haircuts, shampoos, & permanents: 3,500

Unit Contribution Margin = Unit Selling Price - Unit Variable Costs = $30 - $22.50 = $7.50

Contribution Margin Ratio: Unit Contribution Margin / Unit Selling Price = $7.50/$30 = 25%

Break-Even Point in Dollars: Fixed Costs / Contribution Margin Ratio = 16,500 / 25% = 66,000

Break-Even in Units = Fixed Costs / Unit Contribution Margin = 16,500 / $7.50 = 2,200

Margin of Safety (in $) = Actual (Expected) Sales - Break-Even Sales = 105,000 - 66,000 = 39,000

Margin of Safety Ratio = Margin of Safety in Dollars / Actual (Expected) Sales = 39,000 / 105,000 = 37.14%