Colin was a professional classical guitar player until his motorcycle accident that left him disabled. After long months of therapy, he hired an experienced luthier (maker of stringed instruments)and started a small shop to make and sell Spanish guitars. The guitars sell for $700 and the fixed monthly operating costs are as follows: Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and that anything past that point was pure profit. What is the amount of revenue Colin should earn each month to break even?

Question

Colin was a professional classical guitar player until his motorcycle accident that left him disabled. After long months of therapy, he hired an experienced luthier (maker of stringed instruments)and started a small shop to make and sell Spanish guitars. The guitars sell for $700 and the fixed monthly operating costs are as follows:  Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and that anything past that point was pure profit. What is the amount of revenue Colin should earn each month to break even?

Quizplus · Accepted Answer

To calculate the break-even point, we use the formula:

Break-even point = Fixed costs / Contribution margin ratio

Fixed costs = $2,000 + $3,000 + $1,500 = $6,500
Contribution margin ratio = 1 - 0.60 = 0.40

Break-even point = $6,500 / 0.40 = $16,250

Therefore, Colin needs to earn $16,250 in revenue each month to break even.

The correct answer choice is B ($6,635) as it is the closest to the calculated break-even point.

Colin Was a Professional Classical Guitar Player Until His Motorcycle