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Financial Analysis: Planning & Budgeting

In: Business and Management

Submitted By peterribbit
Words 525
Pages 3
The contribution margin per haircut at Andre’s Hair Styling is $11.60. To arrive at this total, we must know how compute the contribution margin. The contribution margin is the sales price per unit minus the total variable cost per unit (Wild & Shaw, 2012). In this case, the sales price per unit is the price of each haircut, which is $12.00 per head. The variable cost per unit is the cost of the shampoo per head, which is .40 cent per head. The formula is: $12 - $0.40 = $11.60. The contribution margin ratio is 0.9666 or 96.66%. To obtain this number, you must divide the contribution margin per unit by the sale price per unit. The formula is: $11.60 / $12.00 = 0.9996.
The Annual Break Even Point, in the number of haircuts will be 10,345 haircuts. To arrive at this total, we must first determine the fix cost of the operation. In this case the fix cost is the annual salary of the five barbers and the annual rent of the business (Wild $ Shaw, 2012). The salary of the barbers is $9.90 an hour, times 40 hours a week, times 50 weeks a year, equaling $99,000 annually. The rent is $1750 a month, time 12 months, equaling $21,000 annually. The formula for fix cost is: $99,000 + $21,000 = $120,000. To get the annual break-even point we must divide the fix cost by the contribution margin (Wild & Shaw, 2012). The formula will be $120,000 / $11.60 = 10,345 cuts.
The operating income for the barber shop if 20,000 haircuts are performed will be $112,000. The operating income is the gross profit of the barber shop minus the operating expenses of the barber shop. We already know that operating expenses of the barber shop is the barber’s salary plus the shop rent ($120,000). This is also known as the fix cost (Wild & Shaw, 2012). The gross profit of the barber shop is the number of heads cut (20,000), times the contribution margin ($11.60). The formula is: 20,000 x

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