# Contribution margin, annual break-even point, and operating income of a business

Analyze a barber/style shop business. Danita has five barbers working for her and she is not one of them. Each barber is paid \$9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. Rent and other fixed expenses are \$1,750 per month. Hair shampoo used on all clients is .40 per client. Assume that the only service performed is the giving of haircuts (including shampoo), the unit price of which is \$12. Danita has asked me to find the following information.

1. Find the contribution margin per haircut. Assume that the barbers' compensation is a fixed cost. Show calculations to support your answer.

2. Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer.

3. What will be the operating income if 20,000 haircuts are performed? Show calculations to support your answer.

4. Suppose Danita revises the compensation method. The barbers will receive \$4 per hour plus \$6 for each haircut. What is the new contribution margin per haircut? What is the annual break-even point (in number of haircuts)? Show calculations to support your answer.

Solution Summary

This solution examines the contribution margin, annual break-even point, and operating income of a business.

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Yongjun Luo, PhD (IP)

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Active since 2004

BSc, Shanghai Jiao Tong University
PhD (IP), University of Maryland, College Park

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