Question

Exercise 20-2 In the month of June, Jose Hebert's Beauty Salon gave 4,200 haircuts, shampoos, and permanents at an average price of $ 40. During the month, fixed costs were $ 16,700 and variable costs were 75% of sales. Determine the contribution margin in dollars, per unit and as a ratio. (Round contribution margin per unit and contribution margin ratio to 2 decimal places, e.g. 5.25 & 10.50.) Contribution margin Contribution margin per unit Contribution margin ratio $ % LINK TO TEXT VIDEO: SIMILAR EXERCISE Using the contribution margin technique, compute the break-even point in dollars and in units. (Round answers to 0 decimal places, e.g. 1,225.) Break-even point $ Break-even point units LINK TO TEXT VIDEO: SIMILAR EXERCISE

Answer 1

Answer)

Calculation of Contribution margin per unit, Contribution margin and Contribution margin ratio

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

                                                      = Selling price per unit – (Selling price per unit X Variable cost as a percentage of sales)

                                                                    = $ 40 per unit – ($ 40 per unit X 75%)

                                                                    = $ 40 per unit - $ 30 per unit

                                                                    = $ 10 per unit

Contribution margin = Contribution margin per unit X Number of haircuts

                                       = $ 10 per unit X 4,200 haircuts

                                       = $ 42,000

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

                                               = $ 10 per unit/ $ 40 per unit

                                               = 25%

Calculation of break-even point in dollars and in units

Break-even point in dollars = Total fixed cost/ Contribution margin ratio

                                                  = $ 16,700/ 25%

                                                   = $ 66,800

Break-even point in units = Total fixed cost/ Contribution margin per unit

                                                = $ 16,700/ $ 10 per unit

                                                = 1,670 units     

Calculation of margin of safety in dollars and margin of safety ratio

Margin of Safety in dollars = Current sales in dollars – Break even sales in dollars

                                                 = (Number of Units sold currently X selling price per unit) – Break even sales in dollars

                                                       = (4,200 haircuts X $ 40 per haircut) - $ 66,800

                                                        = $ 168,000 - $ 66,800

                                                        = $ 101,200

Margin of Safety ratio = [(Current sales level – Break even point)/ Current sales level] X 100

                                         = [($ 168,000 - $ 66,800)/ $ 66,800] x 100

                                         = [$ 101,200/ $ 66,800] x 100

                                          = 151% (Rounded off).