Floyd's Barbershop has fixed costs of $3,000 per month. Floyd currently breaks-even when it performs 400 haircuts a month. Floyd charges customers $10 per cut. What is Floyd's variable cost per cut?

Question

Quizplus · Accepted Answer

To find the variable cost per cut, we need to use the formula:

Variable cost per unit = (Total cost - Total fixed cost) / Number of units

We know that Floyd's Barbershop has fixed costs of $3,000 per month and breaks even when it performs 400 haircuts a month. This means that the revenue from 400 haircuts is equal to the total costs including fixed costs.

Revenue = Price per cut x Quantity = $10 x 400 = $4,000

Total cost including fixed cost = Revenue = $4,000

Total variable cost = Total cost including fixed cost - Total fixed cost = $4,000 - $3,000 = $1,000

Variable cost per cut = Total variable cost / Quantity = $1,000 / 400 = $2.50

Therefore, the variable cost per cut is $2.50 (Option A).

Floyd's Barbershop Has Fixed Costs of $3,000 Per Month