Solution:
a.Calculation of Contribution margin in Dollars:
The formula for calculating the Contribution margin in Dollars is
= Total Sales – Total Variable costs
As per the information given in the question we have
No. of Haircuts = 4,250 ; Selling price per unit = $ 40
Thus the Total sales = No. of Haircuts * Selling price per unit
= 4,250 * $ 40
= $ 170,000
Thus Total sales = $ 170,000
Also, as per the information given in the question we have
No. of Haircuts = 4,250 ; Variable cost per unit = 75 % of selling price = 0.75 * $ 40 = $ 30
Thus the Total Variable costs = No. of Haircuts * Variable cost per unit
= 4,250 * $ 30
= $ 127,500
Thus Total Variable costs = $ 127,500
Thus Contribution Margin in Dollars = $ 170,000 - $ 127,500
= $ 42,500
The Contribution margin in Dollars = $ 42,500
b.Calculation of Contribution margin per unit:
The formula for calculating contribution margin per unit is
= Selling price per unit – Variable cost per unit
As per the information given in the question we have
Selling price per unit = $ 40 ; Variable cost per unit = 75 % of selling price = 0.75 * $ 40 = $ 30
Thus the contribution margin per unit = $ 40 - $ 30 = $ 10
c.Calculation of Contribution Margin Ratio :
The formula for calculating the contribution margin ratio is
= (Total sales – Total Variable costs) / Total sales
As per the calculations made in part b above, we have
Total sales = $ 170,000 ; Total Variable costs = $ 127,500 ;
Applying the above information in the contribution margin ratio we have
= ( $ 170,000 - $ 127,500 ) / $ 170,000
= $ 42,500 / $ 170,000
= 0.25
= 25 %
Thus the contribution margin ratio = 0.25 = 25 %
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