Question

mion margin, break- argin of safety. E6.2 (LO 1), AP Service In the month of June, Jose Hebert's Beauty Salon gave 4,000 haircuts, sham- poos, and hair colorings at an average price of $30 each. During the month, fixed costs were $16.800 and variable costs were 75% of sales. Instructions a. Determine the contribution margin in dollars, per unit and as a ratio. b. Using the contribution margin technique, compute the break-even point in dollars and in units. c. Compute the margin of safety in dollars and as a ratio. ne under die

Answer 1

a)

Selling price per unit = $30

Variable cost per unit = 30 x 75%

= $22.5

Contribution margin per unit = Selling price per unit – Variable cost per unit

= 30 - 22.5

= $7.5

Contribution margin ratio = Contribution margin per unit/Selling price per unit

= 7.5/30

= 25%

b)

Break even point (units) = Fixed cost/Contribution margin per unit

= 16,800/7.5

= $2,240

Break even sales in dollars = Fixed cost/Contribution margin ratio

= 16,800/25%

= $67,200

c)

Present sales = 4,000 x 30

= $120,000

Margin of safety in dollar sales = Present sales - Break even sales

= 120,000 - 67,200

= $52,800

Margin of safety (%) = Margin of safety/Present sales

= 52,800/120,000

= 44%

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