Andres’ Hair Styling’s owner Andre has required carrying out the cost-volume-profit analysis of his business. Calculating the contribution margin of the services that his styling saloon is offering to its customers has done it. The contribution margin is the amount that every unit sale generates upon recovering the variable cost. From the analysis provided below it could be indicated that the contribution margin of Andres’ Hair Styling is charging $12 for hair cut to its customers and the saloon provides shampoo services to its customers who get hair cut. For every shampoo service the saloon incurs cost of $0.40. Therefore, it could be indicated that the cost of shampoo is the only variable cost. The contribution margin calculated for the saloon is $11.60. There is quite significant and can help the business to cover its fixed costs in a shorter period.
Moreover, the analysis indicates that the company incurs different fixed costs including barbers’ salaries and fixed expenses including rent. By adding both cost figures the total fixed cost is determined to be $120,000. It is imperative for the saloon to cover these costs before it can make any profit. From the analysis, it could be indicated that the break even level of the saloon is determined by the dividing the total fixed costs by the contribution margin per unit. Breakeven is a point where total revenue and total cost are equal to each other. In other words, there is no contribution margin at breakeven point. In normal circumstances, labor wages are considered as a variable expense. However, in this case, question requires the salaries to be taken as fixed costs. This makes the variable cost 0 for this calculation. The break even level is obtained upon serving 10,344 customers for their haircuts and shampoo. The profit analysis indicates that the operating profit of the hairstyling saloon is calculated by deducting fixed costs from the total contribution. It is obtained to be $112,000.
Based on the revised break-even analysis, the variable portion of the salary of barber is included in the calculation of the contribution margin, which has resulted in a lower value of $5.6. It has also resulted in high break even level of 10,892 haircuts before the company can actually make any profit.
References
Bose, D. C. (2010). Fundamentals of Financial Management. Delhi: PHI Learning Pvt. Ltd.
Brewer, P., Garrison, R., & Noreen, E. (2012). Introduction to Managerial Accounting: Sixth Edition. New York: McGraw-Hill Higher Education.
Khan, & Jain. (2006). Management Accounting. New Delhi: Tata McGraw-Hill Education.
