Colin was a professional classical guitar player 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,$0.75 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 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,$0.75 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

First, we need to calculate the contribution margin per guitar:

Contribution margin = selling price - variable cost
Contribution margin = $700 - ($350 + $100)
Contribution margin = $250

Next, we can use the contribution margin ratio to determine the sales revenue required to achieve the target profit:

Contribution margin ratio = contribution margin / selling price
Contribution margin ratio = $250 / $700
Contribution margin ratio = 0.3571

To earn $5,100 of operating profit, we need to generate a contribution margin of:

Operating profit = (sales revenue x contribution margin ratio) - fixed costs
$5,100 = (sales revenue x 0.3571) - $3,150
sales revenue = ($5,100 + $3,150) / 0.3571
sales revenue = $12,388.12

Therefore, the amount of sales revenue required to achieve the target profit is $12,388, which is closest to option C ($12,388).

Colin Was a Professional Classical Guitar Player Until a Motorcycle