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# Cost-Volume-Profit Analysis

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Andre has asked you to evaluate his business, AndreÃ¢??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.

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

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

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

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

Contribution margin per unit is the excess of sales revenues per unit over variable costs per unit. The sales revenue per haircut is \$12 and the only variable cost is shampoo at \$.40 per haircut. The contribution margin per unit is thus:

Price of a haircut \$12.00
Shampoo cost per haircut .40
Contribution margin per haircut \$11.60

The break-even point is the point at which the company neither earns nor loses money; it is therefore the point at which the company''s fixed costs equal its contribution margin (i.e., total sales revenue ...

#### Solution Summary

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.

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