Question

Assume a local Cost Cutters provides cuts, perms, and hairstyling services. Annual fixed costs are $120,000, and variable costs are 50 percent of sales revenue. Last year's revenues totaled $270,000.

(a) Determine its break-even point in sales dollars.

(b) Determine last year's margin of safety in sales dollars.

(c) Determine the sales volume required for an annual profit of $90,000.

Answer 1

a) Break even point = Fixed cost / contribution margin

= 1,20,000/0.5

= $2,40,000

b) margin of safety = actual sale- break even sale

= $2,70,000-$2,40,000

=$30,000

c) annual sales when profit $90,000

= (90000+120000)/50%

= 2,10,000/0.5

= $4,20,000

When sale is $4,20,000 we earn profit of $90,000

Answer 2

Requirement: a BEP Dollars = Fixed Expenses /Unit Contribution margin Ratio Fixed Expenses 120000 Contribution margin Ratio 0.50 New breakeven point Dollars sales 240000 Requirement: b Margin of safety = Actual sales - Bep sales Actual sales Bep sales Margin of safety 270000 240000 30000 Requirement: c Desire Sales Volume = Fixed cost + Desire profit / Contribution margin Fixed Expenses 120000 Desire profit 90000 Contribution margin per unit 0.50 Desire sales Volume 420000