Ajax was a professional classical guitarist until a motorcycle accident left him disabled.After long months of therapy,he hired an experienced luthier and started a small shop to make and sell Spanish guitars.The guitars sell for $800,and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | }
\hline \text { Rent and utilities } & \$ 600 \
\hline \text { Wages and benefits to luthier } & 2300 \
\hline \text { Other expenses } & 479 \
\hline
\end{array}$$ Ajax's accountant told him about contribution margin ratios,and Ajax understood clearly that for every dollar of sales,$0.60 went to cover his fixed costs,and anything above that point was profit.
How many guitars does Ajax need to sell each month to break even? (Round your answer up to the nearest whole guitar.)
A) 5 guitars
B) 3 guitars
C) 7 guitars
D) 8 guitars

Question

Ajax was a professional classical guitarist until a motorcycle accident left him disabled.After long months of therapy,he hired an experienced luthier and started a small shop to make and sell Spanish guitars.The guitars sell for $800,and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | } 
\hline \text { Rent and utilities } & \$ 600 \
\hline \text { Wages and benefits to luthier } & 2300 \
\hline \text { Other expenses } & 479 \
\hline
\end{array}$$ Ajax's accountant told him about contribution margin ratios,and Ajax understood clearly that for every dollar of sales,$0.60 went to cover his fixed costs,and anything above that point was profit.
How many guitars does Ajax need to sell each month to break even? (Round your answer up to the nearest whole guitar.)
A) 5 guitars
B) 3 guitars
C) 7 guitars
D) 8 guitars

Quizplus · Accepted Answer

The total fixed costs are $600 + $2300 + $479 = $3379. With a contribution margin ratio of 0.60, this means 60% of sales go towards covering fixed costs. To find the break-even point in dollars, divide the total fixed costs by the contribution margin ratio: $3379 / 0.60 = $5631.67. Since each guitar sells for $800, divide the break-even sales by the price per guitar: $5631.67 / $800 ≈ 7.04. Rounding up to the nearest whole guitar, Ajax needs to sell 8 guitars to break even.

Ajax Was a Professional Classical Guitarist Until a Motorcycle Accident