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.
Juan wishes to make $2,500 of operating profit each month. If so, how many guitars will Juan have to sell?

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.
Juan wishes to make $2,500 of operating profit each month. If so, how many guitars will Juan have to sell?

Quizplus · Accepted Answer

To find the number of guitars Juan needs to sell, calculate the total fixed costs ($960 + $1,500 + $900 = $3,360) and add the desired profit ($2,500), totaling $5,860. Since $0.70 of each dollar goes to cover fixed costs, the contribution margin per guitar is $600 * 0.70 = $420. Divide the total amount needed ($5,860) by the contribution margin per guitar ($420) to find the number of guitars: $5,860 / $420 ≈ 13.95, which rounds up to 14 guitars.

Juan Martinez Played Classical Guitar Professionally Until His Motorcycle Accident