Activity Based Costing and Process Costing
Contribution margin per unit:
Formula = selling price per haircut – total variable cost per haircut
Selling price per haircut = $12
Variable cost per haircut = $0.40
Contribution margin per haircut = $12 - $0.40 = $11.60 per haircut
Discussion:
The contribution per unit is $11.60 per haircut, which means that the every haircut is $11.60 towards the profits of the business. Moreover, the portion of fixed cost is very high as compared to the variable costs.
Annual breakeven point in terms of haircuts:
Breakeven point formula = Total fixed cost for the year / Contribution per haircut
Labor cost per year = 5 barbers x 40 hours x50 weeks x $9.90 = $99,000
Rent and other fixed expenses per year= $1,750 x 12 months = $21,000
The total fixed cost for the year = $99,000 + $21,000 = $120,000
Breakeven point in terms of haircut = $120,000 / $11.60 = 10,345 haircuts per year (approx)
Discussion:
The breakeven point in terms of haircuts is 10,345 haircuts per year. If the business achieves its breakeven point of 10,345 haircuts, then the business will cover all of the fixed and the variable costs associated with the covering of the fixed costs. The excessive sales will increase the profitability without increasing the fixed cost of the business.
Salon does 20,000 haircuts a year:
Sales (20,000 haircuts x $12) = $240,000
Fixed cost = $120,000
Variable cost (20,000 haircuts x $0.40) = $8,000
Profit for the year = Total sales – Fixed cost – variable cost
Profit for the year = $240,000 - $120,000 - $8,000
Profit for the year = $104,000
Discussion:
The sale after achieving the breakeven point increases the portion of the profits because the sales after the breakeven point incur only the portion of variable costs. Therefore, the overall profitability of each haircut is increased due to the elimination of the fixed cost effect. Therefore, the excessive sales show the net profit of $108,000 as compared to the sales of 10,345 haircuts which was the breakeven point.
Andre revised compensation method:
Now the variable costs and the fixed costs are changed due to the amendments in the labor cost of the salon. Therefore, the new breakeven point and the contribution per haircut according to revised variable and fixed costs are:
Contribution per haircut (unit):
Variable cost = $0.40 + $6 = $6.40 per haircut
Selling price per haircut = $12
Contribution per haircut = $12 - $6.40 = $5.60 per haircut
Discussion:
Breakeven point in terms of haircuts:
Labor cost per year = $4 x 40 hours x 50 weeks x 5 barbers = $40,000
Rent and other fixed expenses per year= $1,750 x 12 months = $21,000
Total fixed cost = $40,000 + $21000 = $61,000
Breakeven point in terms of sales = total fixed cost / contribution per unit
= $61,000 / $5.60
= 10,893 haircuts (approx)
Discussion:
