Assume a local Cost Cutters provides cuts, perms, and hairstyling services. Annu

Question

Assume a local Cost Cutters provides cuts, perms, and hairstyling services. Annual fixed costs are $135,000, and variable costs are 70 percent of sales revenue. Last year's revenues totaled $500,000. (a) Determine its break-even point in sales dollars. (b) Determine last year's margin of safety in sales dollars. (c) Determine the sales volume required for an annual profit of $90,000

Explanation / Answer

contribution margin = revenue - variable expenses = 30% of revenue = 150,000 dollar contribution margin ratio = Contribution Margin ÷ Revenues = 150,000/500,000 = 30 % => Break-even Point in Sales =Total Fixed Expenses ÷ Contribution Margin Ratio => Break-even Point in Sales = 135,000/30% = 450,000 sales dollars margin of safety = [(500,000-450,000)= 50,000 sales dollars given profit = 90,000 dollars => x - (135,000+70% of x) = 90,000 => 0.3x = 225,000 => x = 750,000 dollars. Then the sales required = 750,000 dollars. For determining the sales volume, the sales volume for the last year when the profit was 500,000 dollars should be given.

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