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# Calculating the Cost-Volume-Profit (CVP) of a Beauty Salon

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Problem:

Beauty Inc. produces novelty nail polishes. Each bottle sells for \$2.50. Variable unit costs are as follows:
Acrylic base \$0.15
Pigments \$0.08
Other ingredients \$0.20
Bottle, packing material \$0.76
Selling commission \$0.25

Fixed overhead costs are \$10,000 per year. Fixed selling and administrative costs are \$4,310 per year. Beauty Inc. sold 25,000 bottles last year.

Required:

a. What was Beauty's operating income last year?

b. Calculate the breakeven point in unit and sales revenue.

c. What was the margin of safety in sales revenue?

d. Determine the company's degree of operating leverage. Beauty Inc. is confident that with a more intense sales effort and with a more creative advertising program, it can increase sales by 50% next year. What would be the expected percentage increase in net operating income?

e. What level of sales in units would be required to reach a target net operating income of \$20,000?

f. Suppose that Beauty Inc., raises the price to \$3.00 per bottle, but anticipated sales will drop to 23,400 bottles. What will the new break-even point in units be? Should Beauty raise the price? Explain using computations.