Colin was a professional classical guitarist until a motorcycle accident left him disabled.After long months of therapy,he hired an experienced luthier 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 guitarist until a motorcycle accident left him disabled.After long months of therapy,he hired an experienced luthier 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 find the break-even point, we need to use the contribution margin ratio, which is 0.40 (1-0.60). This means that for every dollar of sales, $0.40 is available to cover Colin's variable costs and contribute towards profit.

Using the formula: Break-even point = Fixed costs / Contribution margin ratio

Break-even point = $3,950 / 0.40
Break-even point = $9,875

So Colin needs to earn $9,875 in revenue each month to break even. However, since the guitars sell for $700 each, he would need to sell around 14 guitars a month to break even, which is not a whole number.

Therefore, the closest option is B) $6,635, which is the revenue earned by selling 9 guitars [(9 x $700) = $6,300], which would still cover his fixed costs and contribute towards profit.

Colin Was a Professional Classical Guitarist Until a Motorcycle Accident