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# Calculating Contribution Margin and Breakeven Point

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Andre has asked you to evaluate his business, Andre's Hair Styling. Andre has five barbers working for him. (Andre 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. Andre has asked you 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 Andre 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 Preview

Solution:

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

Price of a haircut=\$12
Variable Cost of a haircut=shampoo cost per client=\$0.40
Contribution Margin per haircut=Price per haircut-Variable Cost per haircut
=12-0.40=\$11.6
Each haircut will have a contribution margin of \$11.6

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

Annual Rent and other ...

#### Solution Summary

Solution describes the steps needed to calculate contribution margin and breakeven point for the given scenario. It also analyzes the effect of a new compensation method on break even quantity.

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