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No Way

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Submitted By ShanteS
Words 277
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TOTAL FIXED = $61,000

It?s nice to have a lower total fixed cost, as this is about half of the previous cost. But we?ve added a Variable Cost of $6 per haircut to Andre?s business. It makes it a little harder to figure out the breakeven. Why? Because at 10,000 haircuts the Fixed Costs are $6.10 per haircut and his Variable Costs are $6 per haircut ? and he?s losing money:
NEW CONTRIBUTION = REVENUES ? (FIXED COST + VARIABLE COST)

At 20,000 haircuts, he makes money, though he?s making less:
$240,000 ? ($61,000 + $120,000) = $59,000 or $2.95 per haircut, which is 24.6% and profit per haircut is less than half what it was previously. ---

NEW BREAKEVEN
================

What?s the point to this problem? It?s that some costs are Fixed and some are Variable in most businesses. And that contribution or contribution margin will depend heavily on revenues or volume.

Breakeven for Andre?s Hair Styling will come when his Fixed
Costs/Haircut are $6 ? because he already has a Variable Cost of
$6/haircut that he?s paying to his employees. So it?s $61,000 / haircuts = $6, or 10,167 haircuts. Actually he?ll make a few dollars
(not even $10) because of some rounding errors in the math:

REVENUES = 10,167 * $12 = $122,004
FIXED COSTS (FC) = $61,000
VARIABLE COSTS (VC) = 10,167 * $6 = $61,002

INCOME = REVENUES ? (FC + VC) = $2

So, Andre?s breakeven went up under the new pay scheme. Now if he?d only given the barbers $5/haircut, it would have gone down . . .

Google search strategy:
?contribution margin?

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