Contribution Margin
Our office had received a request from Andre, owner of Andre 's Styling Saloon to perform an evaluation on his business.
Andre has five barbers that work in the establishment and each employee received a salary of $9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. As rent and other fixed expenses he expends $1,750 every month, plus $ 0.40 as the cost of hair shampoo used on all his clients. This saloon is performing haircuts exclusively and each client paid a flat price of $ 12.00.
He wanted for us to evaluate a new compensation method for his employees. Under the new system the barbers will receive a flat salary of $4 per hour, and a commission of $ 6.00 for each haircut. In this case Andre wants to know how much is going to be the new contribution margin per haircut, the annual break-even point in number of haircuts.
On our evaluation, Andre requested to find the following information.
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
Andre has five barbers that work in the establishment and each employee received a salary of $9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. As rent and other fixed expenses he expends $1,750 every month, plus $ 0.40 as the cost of hair shampoo used on all his clients. This saloon is performing haircuts exclusively and each client paid a flat price of $ 12.00.
He wanted for us to evaluate a new compensation method for his employees. Under the new system the barbers will receive a flat salary of $4 per hour, and a commission of $ 6.00 for each haircut. In this case Andre wants to know how much is going to be the new contribution margin per haircut, the annual break-even point in number of haircuts.
On our evaluation, Andre requested to find the following information.
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
References: Learnthat.com (2006) Contribution Margin Retrieved May 16, 2006 from http://www.learnthat.com/define/view.asp?id=289 Learnthat.com (2006) Break Even Analysis Retrieved May 16, 2006 from http://www.learnthat.com/define/view.asp?id=280 Investopedia (2005) Net Operating Income - NOI. (n.d.) Retrieved May 17 2006 from http://financial-dictionary.thefreedictionary.com/Net+Operating+Income+-+NOI