In the month of June, Jose Hebert’s Beauty Salon gave 4,000 haircuts, shampoos, and permanents at an average price of $30. During the month, fixed costs were $16,800 and variable costs were 75% of sales
1)
Determine the contribution margin in dollars, per unit and as a ratio.
2)
Using the contribution margin technique, compute the break-even point in dollars and in units
3)
Compute the margin of safety in dollars and as a ratio
Answer:
1)
Contribution Margin
Contribution Margin per Unit
= Sales Price – Variable Expenses
= $30 – $22.50 ($30 x 75%)
= $7.50
Contribution Margin as a ratio
= 100% total – 75% variable
= 25% or 1/4
2)
Break-even in units
= $16,800/$7.50
= 2,240 units
Break-even in dollars
= 2,240 units x $30
= $67,20
3)
Margin of safety
= (Sales – Break Even)/Sales
Margin of Safety as a ratio
= ($120,000 – $67,200)/$120,000
= 0.44 or 44%
Margin of Safety in $
= 4,000 units x $30
= $120,000 – $67,200
= $52,800
