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 much sales revenue will Juan have to make?

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 much sales revenue will Juan have to make?

Quizplus · Accepted Answer

Juan's fixed costs are $3,360 ($960 + $1,500 + $900). To achieve $2,500 profit, he needs to cover $5,860 ($3,360 + $2,500) in total. With a contribution margin ratio of 0.70, he needs $8,400 in sales revenue ($5,860 / 0.70).

Juan Martinez Played Classical Guitar Professionally Until His Motorcycle Accident