# Contribution Margin

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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
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

Rent: \$ 1,750 per month, Yearly cost: \$ 21,000
1750* 12 = 21,000 or \$ 21,000

Fixed Cost \$ 120,000
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 =