1. Contribution margin per hair cut performed
2. Number of haircuts for annual breakeven point
Breakeven point is the point where the total income from the performed activity equals the total sum of the fixed expenditure per year. In this case, it is the point where the total income from the haircuts equals the total fixed expenditure per year.
We must therefore calculate the total expenses per year, which is given as the sum of Barbers expenses per year and other expenses.
Barbers expenses
Total expenses from workers per hour = 5 X 9.9 = $ 49.5
Workers expense per week = 49.5 X 40 = $1980
Workers expense in a year =1980 X 50 = $99000
Other expenses
Add: Rent and other expenses (1750 X12) $21000
Total annual expenses
= $120000
Total number of haircuts in a year that will yield a total of $120000 therefore,
=120000/11.6
Approximately 10,345 haircuts
3. Operating income if 20,000 haircuts are performed
The contributing margin of 11.6 per haircut makes the price increase by the same amount to help cover the fixed expenses.
Therefore operating income for 20000 haircuts
(11.6 + 12) X 20000 = $ 472000
Less: total expenses ($120,000)
Operating income therefore is $352,000.
4.
New contributing margin per haircut = $ 12 - $(6 + 0.4)
=$ 5.6
Annual breakeven points in number of haircuts:
Total expenses from workers per hour (5X4) = $ 20
Workers expense per week (20X40) = $ 800
Workers expense in a year (800X50) = $40,000
Other expenses
Add: Rent and other expenses (1750 X12) $ 21,000
Total annual expenses
= $ 61,000
Annual breakeven point therefore = $(61,000 / 5.6)
Approximately $ 10,893 haircuts
Reference
Introduction to Break-even point. Retrieved at http://www.accountingcoach.com/online-accounting-course/01Xpg01.html#break-even-point/
The provided case study.
