Question

Assume Strands, a local hair salon, provides cuts, perms, and hairstyling services. Annual fixed costs are $150,000, and variable costs are 40 percent of sales revenue. Last year's revenues totaled $300,000.
(a) Determine its break-even point in sales dollar
(b) Determine last year's margin of safety in sales dollars.
(c) Determine the sales volume required for an annual profit of $80,000.
Round your answer to the nearest dollar.

Answer 1

Answer:

Instructions are below.

Explanation:

Giving the following information:

Annual fixed costs are $150,000, and variable costs are 40 percent of sales revenue. Last year's revenues totaled $300,000.

To calculate the break-even point in dollars, we need to use the following formula:

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 150,000 / [(300,000*0.6)/300,000]

Break-even point (dollars)= $250,000

Now, we can determine the margin of safety:

Margin of safety= (current sales level - break-even point)

Margin of safety= 300,000 - 250,000= $50,000

Finally, the sales dollar required to reach $80,000 profit:

Break-even point (dollars)= (fixed costs + desired profit) / contribution margin ratio

Break-even point (dollars)= (150,000 + 80,000) / 0.6

Break-even point (dollars)= $383,333.33