# Contribution Margins and Break-even Point

Andre has asked you to evaluate his business, Andre's Hair Stylling. 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. Assume that the only service performed is the giving of haircuts, 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.

3. What will be the operating income if 20,000 haircuts are preformed? 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.

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#### Solution Preview

Andre's Hair Styling business

Andre's total cost can be calculated as follows:

9.9x40x50x5 = 99,000, This is the annual money paid to the barbers. In addition we have the mothly fixed cost 1750x 12 which gives us the yearly cost of 21,000. So we have a total of 120,000 which if divided by $12 the price of each haircut gives us the breakeven point. That is 10,000 haircuts are needed to break ...