Question

In the month of March, Bramble Salon services 550 clients at an average price of $130. During the month, fixed costs were $23,400 and variable costs were 70% of sales. Determine the contribution margin in dollars, per unit, and as a ratio. Contribution margin Contribution margin per unit Contribution margin ratio
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Answer 1

1. Contribution Margin = Sales - Variable cost

Sales = 550 clients * $130 per client

= $ 71,500

Variable cost = 70% of sales i.e. $ 50,050

Thus, Contribution margin = 71500 - 50050 = $ 21,450

2. Contribution margin per unit = Contribution margin/ no. of units

= $ 21,450/ 550 clients

= $ 39 per unit

3. Contribution margin ratio = 30%

Variable costs are 70% of sales, Hence, contribution ratio = (100 - 70) i.e. 30%

4. Break even sales (in units) = Total fixed cost/ Contribution per unit

= $ 23,400/ 39

= 600 clients

5. Break even sales (in $) = 600 clients * $ 130 per client

= $ 78,000

In the given scenario, as the company is unable to achieve it's break even i.e. 600 clients, it has to increase it's production level, as currently the company is incurring losses.