Contribution margin per unit in this case the air cut is the amount by which sales or income revenue is goes beyond or exceeds the amount of variable costs. Contribution margin can be calculated as the total contribution margin and the contribution margin per unit (Pinson, 2008). The formula for the calculation is as follows;
Contribution margin per unit = unit price - ; variable cost per unit.
Total contribution margin = Total sales – total variable costs.
Variable costs are the costs that will vary in proportion with the amount or level of production. Variable costs may be direct costs associated with the product, or indirect costs. Direct variable cost includes direct material costs and the direct labor costs, while indirect variable costs include certain overheads that are variable.
For the case of Andre, the contribution margin per hair cut will be calculated as follows;
Ascertaining the unit price, and all the variable costs
Unit price = $12
Variable cost per unit = 0.40 dollars per client
Therefore the contribution per unit = 12 – 0.40 = 11.6 dollars.
2. Annual Break-even Point
The breakeven point in any operating business is the point at which income is equal to expenses. At this point, the business is neither operating at a profit nor at a loss. This point forms the beginning from which an increase in the total sales will or a decrease in the total costs of a business generates profits or gains, and a reduction in the total sales or increase in the total costs of the business will lead to loss generation (Cafferky, 2010).
The break even is an important point in business. This is the point that the management enters in to planning the activities of the business. When a business knows the number of sales that are needed to cover all the costs of the business, the owner will be in a better position to know the number of additional units to produce in order to make profits.
For the case of Andre, the breakeven point is calculated as follows;
BEP = fixed costs + variable costs
The annual breakeven point will be;
Total costs = fixed cost + variable costs
Fixed costs per annum = Barbers compensation annually + rent and other fixed expenses = (9.90 * 40 * 50 * 5) + (1750 * 12) = 99000 + 21000 = 120,000 dollars per annum.
Variable costs per annum assuming that there is ten haircuts per day = cost of hair shampoo = 0.40 * 10 * 50 * 7 = 1400 dollars.
Therefore, breakeven point = 120,000 + 1400 = 121,400 dollars per year. This is a breakeven point when assumed that ten clients are available each day in the shop. The breakeven point will change if the number of customers changes.
3. Operating Income if 20,000 Haircuts Are Performed
Operating income is the net income of the total operating costs.
Total contribution = 20000*12240000
Less Variable Costs …