# Contribution Margin

1.Find the contribution margin per haircut.

Contribution Margins Definition

"Contribution margin (or margins) refers to the amount of revenue per product that is available to "contribute" towards the fixed costs and the profit of the company. Since, for digital products, the variable costs are typically very small, or zero, most of the revenue earned from the sale of a product form the contribution margin. Assuming the contribution margin (unit price - unit variable cost) > 0, then the product is worth marketing, since the fixed costs are sunk. This also assumes the product does not cannibalize sales from another product in the product line, if so, the opportunity costs need to be considered" (Learnthat.com (2006)). Contribution Margin= Unit Price Unit Variable Cost

2.Determine the annual break-even point, in number of haircuts. Break Even Analysis Definition

"Break Even Analysis refers to the calculation to determine how much product a company must sell in order to break even on that product. It is an effective analysis to measure the impact of different marketing decisions. It can focus on the product, or incremental changes to the product to determine the potential outcomes of marketing tactics. Learnthat.com (2006))

1.Find the contribution margin per haircut. We are going to assume that the barbers' compensation is a fixed cost. To be able to calculate the contribution margin we need to deduct the unit variable cost from the sale price per unit. In our case the cost per each haircut is $ 12.00 and the variable price $ 0.40 that represents the cost of shampoo used for each customer.

Unit Contribution Margin: $ 11.60

Unit sale price: $ 12.00

Less variable cost: $ 0.40

Unit Contribution Margin = $ 11.60

2.Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. To be able to determinate the Annual Break Even Point we have to determinate the fixed cost first and divide the sum by the unit contribution margin obtained by subtracting the variable cost from the unit sale price.

Barber's Salaries:

Salary per barber per week: $ 396.00

Price per hour = $ 9.90, hours per week = 40

Weekly salary per barber: 9.90 * 40 = 396.00 or $ 396.00

Salary per barber by year: $ 19,800

Weekly salary per barber = $ 396, number of weeks per year = 50 Yearly salary per barber: 396.00 * 50 = 19,800 or $ 19,800

Andre's barbers salaries per year: $ 99,000

1 barber = $ 19,800, quantity of barbers= 5

Total salaries: 19,800 * 5= 99,000 or $ 99,000

Overhead Cost:

Rent: $ 1,750 per month, Yearly cost: $ 21,000

1750* 12 = 21,000 or $ 21,000

Fixed Cost: $ 120,000

Salaries + Overhead Cost

99,000 + 21,000 = 120,000 or $ 120,000

To be able to determinate the Annual Break Even Point we have to determinate the fixed cost first and divide the sum by the unit contribution margin obtained by subtracting the variable cost from the unit sale price. Break- Even Point: 10,345

Fixed Cost / Unit Contribution...

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