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: $$\begin{array} { | l | r | }
\hline \text { Rent and utilities } & \$ 800 \
\hline \text { Wages and benefits to luthier } & 2,500 \
\hline \text { Other expenses } & 480 \
\hline
\end{array}$$ 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.
-
Colin is planning to increase the selling price to $750. What impact will the increase in selling price have on the contribution margin ratio?

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: $$\begin{array} { | l | r | } 
\hline \text { Rent and utilities } & \$ 800 \
\hline \text { Wages and benefits to luthier } & 2,500 \
\hline \text { Other expenses } & 480 \
\hline
\end{array}$$ 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.
-
Colin is planning to increase the selling price to $750. What impact will the increase in selling price have on the contribution margin ratio?

Quizplus · Accepted Answer

The contribution margin ratio is calculated as (Selling Price - Variable Costs) / Selling Price. Since the selling price increases while variable costs remain constant, the contribution margin ratio will increase.

Colin Was a Professional Classical Guitar Player Until His Motorcycle