Essay On Planning And Budgeting

570 words - 3 pages

Andre's Hair Stylling employs 5 barbers at $9.90 per hour, 40 hours per week, and 50 weeks per year. The salary rate applies regardless of the number of haircuts performed by the barber. Fixed expenses total $1,750 per month and the cost for shampoo per client is $0.40. The total cost for each hair cut is $12.00. Using this data, I found the following information.1. Contribution margin is sales revenue less variable costs. It is the amount available to pay for fixed costs and provide any profit after variable costs have been paid. (Wikipedia, 2006) Find the contribution margin per haircut:Unit sales price - unit variable cost = contribution margin12.00 ...view middle of the document...

Determine the break even point:Break-Even Point in Units = Total Fixed Costs / Contribution Margin per UnitBreak-even point in Units = 21,000 rent, yearly + 99,000 salaries, yearly / 11.60Break even point in Units = 10,345 haircuts3. Operating income is a measure of a company's earning power from ongoing operations, equal to earnings before deduction of interest payments and income taxes.The operating income for 20,000 haircuts:Revenues - variable costs - fixed costs = operating income20,000 haircuts x $12 = $240,000$0.40 shampoo x 20,000 = $8,000$1,750 rent x 12 months = $21,00050 weeks x (9.90/hour x 40 hours) x 5 barbers = $99,000$240,000 - $8,000 - $99,000 - $21,000 = $91,000 operating income4. Compensation method revised. Barbers will receive $4 per hour plus $6 for each haircut.Unit sales price - unit variable cost = contribution margin$6.00 per cut - 0.40/shampoo = contribution margin$5.60 = contribution marginBreak-Even Point in Units = Total Fixed Costs / Contribution Margin per Unit50 weeks x ($4.00/hour x 40 hours) x 5 barbers = $40,000Break even in units = 21,000 rent, yearly + 40,000 salaries / $5.60Break even in units = 10,893 haircutsReferences:Horngren, C., Sundem, G. & Stratton, W. (2005). Introduction to Management Accounting. Upper Saddle River, NJ: Pearson Prentice Hall.Operating Income and Operating Profit Margin. Retrieved June 27, 2006 from Margin. Retrieved June 28, 2006 from


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