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: 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:  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

To make $2,500 of operating profit, Juan needs to cover his fixed costs ($2,500 / $0.70 = $3,571.43) and then make an additional $2,500.

Therefore, his total sales revenue needs to be $6,071.43 ($3,571.43 + $2,500).

To achieve this, Juan needs to sell approximately 10 guitars per month ($6,071.43 / $600 = 10.12, rounded up to 10).

Option C, $8,400, is the only amount above $6,071.43, making it the best choice.

Juan Martinez Played Classical Guitar Professionally Until His Motorcycle Accident