Juan Martinez played classical guitar professionally until his motorcycle accident left him disabled. After long months of therapy, he hired an experienced luthier (maker of stringed instruments) and opened a small shop that makes and sells Spanish guitars. The guitars sell for $600, and the fixed monthly operating costs are as follows:
$$\begin{array} { l r }
\text { Rent and utilities } & \$ 960 \
\text { Wages and benefits of luthier } & \$ 1,500 \
\text { Other } & \$ 900
\end{array}$$
-
Juan got confused when his accountant told him about contribution margin ratios, but he understood clearly that for every dollar of sales, $0.70 went to cover his fixed costs, and that anything past that point was pure profit.
How many dollars of revenue does Juan have to make each month to break even?

Question

Juan Martinez played classical guitar professionally until his motorcycle accident left him disabled. After long months of therapy, he hired an experienced luthier (maker of stringed instruments) and opened a small shop that makes and sells Spanish guitars. The guitars sell for $600, and the fixed monthly operating costs are as follows:
$$\begin{array} { l r } 
\text { Rent and utilities } & \$ 960 \
\text { Wages and benefits of luthier } & \$ 1,500 \
\text { Other } & \$ 900
\end{array}$$
-
Juan got confused when his accountant told him about contribution margin ratios, but he understood clearly that for every dollar of sales, $0.70 went to cover his fixed costs, and that anything past that point was pure profit.
How many dollars of revenue does Juan have to make each month to break even?

Quizplus · Accepted Answer

The total fixed costs are $960 + $1,500 + $900 = $3,360. With a contribution margin ratio of 0.70, the break-even revenue is $3,360 / 0.70 = $4,800.

Juan Martinez Played Classical Guitar Professionally Until His Motorcycle Accident