Financial Control

Business Evaluations

Contribution Margin per hair cut

Contribution Margin is calculated as Sale Price minus Variable Cost

Sale Price is the unit price per hair cut , i .e 12

Variable Cost is Nil as all costs are assumed to be fixed cost

Barbers ' compensations is assumed to be Fixed Cost . Rent and other fixed exp . per month are 1750

Therefore contribution per haircut will be 12 , as there are no variable cost to it

Annual Break Even Point

Break Even point is a no profit no loss point . It is

point where contribution margin available after reducing variable cost from sales is exactly equal to fixed cost of the enterprise . In our case there are no variable costs to hair cuts performed by Andre . So all collections from hair cuts contribute to margin to achieve break even point . Andre has to meet only fixed expenses to arrive at his break even point .Barbers ' Compensation 99000 (calculated as 9 .90 5 40 50

Rent Other fixed Costs 21000 1750 12 )Contribution Margin per hair cut 12

Hence number of hair cuts required for yearly break even 120000 /12 or 10000 hair cuts

Operating Income at 20000 haircuts

a ) Revenue at 20000 haircuts 240 ,000

b ) Variable Cost Nil

c ) Contribution Margin (a-b 240 ,000

d ) Fixed Cost (as calculated above 120 ,000

e ) Operating income (d-e 120 ,000

b ) Calculations at revised compensation method

i ) Contribution Margin per hair cut

Revenue per hair cut 12

Less Variable Cost

Compensation 6 hair cut 6 (Only one barber will be used for one haircut

Contribution Margin per hair Cut 6

ii ) Annual Break even point in number of hair cuts

Annual Fixed Cost

Compensation (4 5 40 50 40000

Rent Other fixed costs 21000

Contribution required for Break Even 61000

Contribution per hair cut 6

No . of hair cuts for Break Even 40000 /6 or 10166 .66 haircuts or 10167 haircuts PAGE

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