Contribution Margin

1247 WordsMar 25, 20075 Pages
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…show more content…
Net Operating Income - NOI A company 's operating income after operating expenses are deducted, but before income taxes and interest are deducted. If this is a positive value, it is referred to as net operating income, while a negative value is called a net operating loss (NOL). Notes: NOI is often viewed as a good measure of company performance. Some believe this figure is less susceptible than other figures to manipulation by management. (Investopedia (2005)) OPERATING INCOME = REVENUES – (FIXED COSTS + VARIABLE COSTS) Revenue calculations: $ 240,000 20,000 * $ 12.00 = $ 240,000 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 Variable Cost $ 8,000 Variable cost: 20,000 * 0.40 = $ 8,000 OPERATING INCOME= $ 112,000 OPERATING INCOME = REVENUES – (FIXED COSTS + VARIABLE COSTS) 240,000 – (120,000 + 8,000) 240,000 – 128,000 = $ 112,000 4. Suppose Andre revises the compensation method. The barbers will receive $4 per hour plus $6 for each haircut. What is the new contribution margin per haircut? What is the annual break-even point (in number of haircuts)? Show calculations to support your answer. Barber 's Salary by Week: $ 160.00 Price per hour = $ 4, hours per week = 40 Weekly salary per barber: 4 * 40 = 160 or $ 160.00 Barber 's Salary by year: $ 8,000 Weekly salary per barber =
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