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: $$\begin{array} { | l | r | }
\hline \text { Rent and utilities } & \$ 1,210 \
\hline \text { Wages and benefits to luthier } & 2,500 \
\hline \text { Other expenses } & 481 \
\hline
\end{array}$$ Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales, $0.75 went to cover his fixed costs, and that anything past that point was pure profit.
Colin wishes to earn $5,100 of operating profit each month. Calculate the amount of sales revenue required to achieve the target profit.

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: $$\begin{array} { | l | r | } 
\hline \text { Rent and utilities } & \$ 1,210 \
\hline \text { Wages and benefits to luthier } & 2,500 \
\hline \text { Other expenses } & 481 \
\hline
\end{array}$$ Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales, $0.75 went to cover his fixed costs, and that anything past that point was pure profit.
Colin wishes to earn $5,100 of operating profit each month. Calculate the amount of sales revenue required to achieve the target profit.

Quizplus · Accepted Answer

Contribution margin ratio is the difference between the selling price and the variable cost. CM ratio = (Selling price - Variable cost) / Selling price.

Given that for every dollar of sales, $0.75 goes to cover fixed costs. Therefore, the contribution margin ratio is 0.25.

Let x be the amount of sales revenue required to achieve the target profit.

Contribution margin = 0.25 * x

Total fixed costs = $1,210 + $2,500 + $481 = $4,191

Target profit = Operating profit - Total fixed costs
$5,100 = Operating profit - $4,191
Operating profit = $9,291

Therefore, the equation becomes:

$9,291 = 0.25x
x = $37,164

Hence, the amount of sales revenue required to achieve the target profit is $12,388. The correct answer is C.

Colin Was a Professional Classical Guitar Player Until His Motorcycle