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# Total Contribution Margin at Break Even Point

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The following monthly data in contribution format are available for Rhys Company and its only product, Product SD:

Total Per Unit

Sales \$ 83,700 \$ 279
Variable expenses 32,700 109
_________ _______
Contribution margin 51,000 \$ 170
Fixed expenses 40,000
Net operating Income \$ 11,000

Scenarios b, c and d are independent of each other. Show calculations for b, c and d.

Required:

a. Without resorting to calculations, what is the total contribution margin at the break even point?
b. Management is contemplating the use of plastic gearing rather than metal gearing in product SD.This change would reduce variable expenses by \$ 18 per unit. The company's sales manger predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 250 units per month. Should this change be made?
c. Assume that Rhys Company is currently selling 300 units of Product SD per month. Management wants o increase sales and feels this can be done by cutting the selling price by \$ 22 per unit and increasing the advertising budget by \$ 20,000 per month.
Management believes that these actions will increase unit sales by 50%.Should these changes be made?
d. Assume that Rhys Company is currently selling 300 units of Product SD. Management wants to automate a portion of the production process for Product SD.The new equipment would reduce direct labor costs by \$ 20 per unit but would result in a monthly rental cost for the new robotic equipment of \$ 10,000.Management believes that the new equipment will increase the reliability of product SD thus resulting in an increase in monthly sales of 12%.Should these changes be made?

#### Solution Preview

The following monthly data in contribution format are available for Rhys Company and its only product, Product SD:

Total Per Unit
Sales \$ 83,700 \$ 279
Variable expenses 32,700 109
_________ _______
Contribution margin 51,000 \$ 170
Fixed expenses 40,000
Net operating Income \$ 11,000

Scenarios b, c and d are independent of each other. Show calculations for b, c and d.

Required:

a. Without resorting to calculations, what is the total ...

#### Solution Summary

The total contribution margin at the break even point is calculated.

\$2.19
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## Cost Volume Profit Analysis (CVP): Contribution Margins and Break-even Point

Andre has asked you to evaluate his business, Andre's Hair Styling. Andre has 5 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. Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation.
2) 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.

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