In the month of June, Jose Hebert’s Beauty Salon gave 3,500 haircuts, shampoos, and permanents at an average price of $30. During the month, fixed costs were $16,500 and variable costs were 75% of sales. Determine the contribution margin in dollars, per unit and as a ratio. (Round contribution margin per unit and contribution margin ratio to 2 decimal places, e.g. 5.25 & 10.50.) Contribution margin $ Contribution margin per unit $ Contribution margin ratio % Using the contribution margin technique, compute the break-even point in dollars and in units. (Round answers to 0 decimal places, e.g. 1,225.) Break-even point $ Break-even point units Compute the margin of safety in dollars and as a ratio. (Round answers to 0 decimal places, e.g. 1,225.) Margin of safety $ Margin of safety ratio %
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
| Contribution margin |
$
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| Contribution margin per unit |
$
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| Contribution margin ratio |
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% |
| Break-even point |
$
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| Break-even point |
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units |
| Margin of safety |
$
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| Margin of safety ratio |
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% |
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