Eric 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 $750 and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | }
\hline \text { Rent and utilities } & \$ 1,200 \
\hline \text { Wages and benefits to luthier } & 2,600 \
\hline \text { Other expenses } & 500 \
\hline
\end{array}$$ Eric'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 Eric should earn each month to break even?
A) $10,750
B) $7,167
C) $5,167
D) $6,334

Question

Eric 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 $750 and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | } 
\hline \text { Rent and utilities } & \$ 1,200 \
\hline \text { Wages and benefits to luthier } & 2,600 \
\hline \text { Other expenses } & 500 \
\hline
\end{array}$$ Eric'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 Eric should earn each month to break even?
A) $10,750
B) $7,167
C) $5,167
D) $6,334

Quizplus · Accepted Answer

To calculate the break-even revenue, we first determine the total fixed costs: $1,200 (Rent and utilities) + $2,600 (Wages and benefits) + $500 (Other expenses) = $4,300. Since $0.60 of every sales dollar goes to cover fixed costs, we divide the total fixed costs by 0.60 to find the break-even revenue: $4,300 / 0.60 = $7,166.67, which rounds to $7,167.

Eric Was a Professional Classical Guitar Player Until His Motorcycle