Compute Contribution Margin, Break-Even Point, And Margin Of

Compute Contribution Margin Break Even Point And Margin Of Sa

E22-5, Compute contribution margin, break-even point, and margin of safety. In the month of June, Bonita Beauty Salon gave 2,700 haircuts, shampoos, and permanents at an average price of $30. During the month, fixed costs were $18,000 and variable costs were 70% of sales.

Instructions: (a)(1) Determine the contribution margin in dollars. Total Sales $81,000 Variable Cost 56,700 Contribution margin in dollars $24,300 (a)(2) Determine the contribution margin as a ratio. Contribution margin in dollars Total Haircuts Given Per unit Contribution margin (b)(1) Using the contribution margin technique, compute the breakeven point in dollars. Breakeven sales (in dollars): Amount = Formula Percentage (b)(2) Using the contribution margin technique, compute the breakeven point in units. Breakeven sales (in units): Amount = Formula units Amount (c)(1) Compute the margin of safety in dollars. Margin of safety (in dollars): Amount - Amount = Formula (c)(2) Compute the margin of safety as a ratio. (Rounded to a whole percentage.) Margin of safety (ratio): Amount à· Amount = Formula

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The analysis of contribution margin, breakeven point, and margin of safety provides essential insights into the financial health and operational efficiency of a business. For Bonita Beauty Salon in June, where a total of 2,700 services were rendered at an average price of $30, and with fixed costs amounting to $18,000, understanding these metrics is vital for sustainable profitability and strategic planning.

Firstly, calculating the contribution margin in dollars involves subtracting total variable costs from total sales. The total sales for the month are given as $81,000. Variable costs, which are 70% of sales, amount to $56,700 ($81,000 × 0.70). Therefore, the contribution margin in dollars is $24,300 ($81,000 - $56,700). This figure represents the amount available to cover fixed costs and generate profit after variable expenses are deducted.

Next, the contribution margin ratio is derived by dividing the contribution margin in dollars by total sales, providing insight into the proportion of each dollar of sales that contributes to covering fixed costs and profit. The ratio is calculated as $24,300 / $81,000 ≈ 0.3 or 30%. This indicates that for every dollar earned, approximately 30 cents is available to offset fixed expenses and profit.

To determine the breakeven point in dollars using the contribution margin technique, the formula involves dividing fixed costs by the contribution margin ratio: Breakeven sales in dollars = Fixed Costs / Contribution Margin Ratio. Substituting the known values results in $18,000 / 0.3 = $60,000. This is the sales level at which total revenues exactly cover fixed and variable costs, implying no profit or loss.

The breakeven point in units is calculated by dividing fixed costs by the contribution margin per unit. First, the contribution margin per unit must be determined. Given the average price per service is $30, and variable costs are 70% of sales, the variable cost per unit is $21 ($30 × 0.70). The contribution margin per unit, therefore, is $9 ($30 - $21). Using this, the breakeven units are 2,000 units ($18,000 / $9). This shows the number of services needed to cover all costs.

The margin of safety in dollars measures how much sales can drop before the business reaches its breakeven point. It is calculated as actual sales minus break-even sales. Since actual sales are $81,000 and the breakeven sales are $60,000, the margin of safety in dollars is $21,000 ($81,000 - $60,000). This indicates the extent to which sales can decline before the business begins to incur losses.

Finally, the margin of safety ratio offers a percentage perspective of safety relative to actual sales, calculated as the margin of safety in dollars divided by actual sales: ($21,000 / $81,000) ≈ 0.259 or 26%. Rounded to a whole percentage, the margin of safety ratio is approximately 26%. This ratio emphasizes the buffer available and is crucial for assessing risk exposure.

In conclusion, these financial metrics — contribution margin, breakeven point, and margin of safety — collectively provide a comprehensive understanding of Bonita Beauty Salon’s operational resilience. They help management make informed decisions regarding pricing, cost control, and sales targets, ultimately contributing to the salon's profitability and long-term stability.

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