Question

16.2 (LO 1), AP Service in the month of June, Jose Hebert's Beauty Salon gave 4,000 haircuts, shampoos, and hair colorings at an iverage price of $30 each. During the month, fixed costs were $16,800 and variable costs were 75% of sales. Compute contribution margin, break-even point, and margin of safety. 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.

Answer 1

Sales = 4,000 x $30 = $120,000

Variable cost = 75% x 120,000 = $90,000

(a) Contribution margin :-

in dollars = Sales - variable cost = 120,000 - 90,000 = $30,000

per unit = Contribution/total units = 30,000/4,000 = 7.5 per unit

in ratio = Contribution/sales = 30,000/120,000 = 0.25 or 25%

(b) Breakeven point :-

in dollars = Fixed cost/contribution margin ratio = 16,800/25%

= $67,200

in units = Fixed cost/contribution per unit = 16,800/7.5

= 2,240 units

​​​​​(c) Margin of safety:-

​​​​​in dollars = current sales - breakeven sales = 120,000 - 67,200

= $52,800

in ratio = [(current sales - breakeven)/current sale] x 100

= [(120,000 - 67,200)/120,000] x 100 = 44%

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