Question

Ned's New Wave Barber Shop specializes in modern unisex haircuts. The only service available at Ned's is a “20-minute” haircut for which the customer is charged $10.The shop has five (5) barbers. (Ned does not work in the shop and, as owner/entrepreneur, he takes no salary.) Each barber is paid an annual salary of $18,000. All equipment including store fixtures and barbering equipment is leased on an annual basis at $4,500 per year. Building space is leased at the rate of $500 per month (or $6,000 per year). Ned is concerned about the shop’s cost structure and seeks your advice.

1)What is the contribution margin per haircut? B)What is the annual break-even point in haircuts?

Answer 1

Solution

Contribution margin is sales revenue less variable costs.

Here sales revenue is $10 per haircut .

Here no variable cost is associated with haircut. All costs given are fixed cost. So contribution margin per haircut is $10 per haircut .

1.

Contribution margin= sales price - variable cost

=$10-$0

=$10 per haircut.

B.

Break even point in haircuts=fixed cost/contribution margin per haircut

Fixed cost:

Annual salary of barbers(18000×5)=$90,000

Equipment charges=$4,500

Rent=$6,000

Total fixed cost=$100,500

Break even point in haircuts=$100,500/$10

=10,050 haircuts