Ajax 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 $800, and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | }
\hline \text { Rent and utilities } & \$ 600 \
\hline \text { Wages and benefits toluthier } & 2300 \
\hline \text { Other expenses } & 479 \
\hline
\end{array}$$ Ajax's accountant told him about contribution margin ratios, and Ajax understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
How many guitars does Ajax need to sell each month to break even? (Round your answer up to the nearest whole guitar.)

Question

Ajax 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 $800, and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | } 
\hline \text { Rent and utilities } & \$ 600 \
\hline \text { Wages and benefits toluthier } & 2300 \
\hline \text { Other expenses } & 479 \
\hline
\end{array}$$ Ajax's accountant told him about contribution margin ratios, and Ajax understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
How many guitars does Ajax need to sell each month to break even? (Round your answer up to the nearest whole guitar.)

Quizplus · Accepted Answer

To break even, Ajax needs to cover his fixed costs of $4,153. This means he needs to sell enough guitars to generate $4,153 in contribution margin.

We know that for every dollar of sales, $0.60 goes towards fixed costs, so $0.40 goes towards contribution margin.

To find the number of guitars he needs to sell, we can use the following equation:

Contribution margin per unit * Number of units = Fixed costs

$400 * x = $4,153

x = 10.38

Since Ajax can't sell a fraction of a guitar, he needs to round up to the nearest whole guitar.

Therefore, he needs to sell 11 guitars to break even.

The closest answer choice is D, 8 guitars, which is incorrect. Therefore, the best choice is D (with an explanation of why it is incorrect).

Ajax Was a Professional Classical Guitarist Until a Motorcycle Accident