Elliott 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 $1,000 and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | }
\hline \text { Rent and utilities } & \$ 1,240 \
\hline \text { Wages and benefits to luthier } & 2,600 \
\hline \text { Other expenses } & 800 \
\hline
\end{array}$$ Elliott's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.90 went to cover his fixed costs,and that anything past that point was pure profit.
Elliott wishes to earn $5,500 of operating profit each month.Calculate the amount of sales revenue required to achieve the target profit.
A) $4,640
B) $5,500
C) $11,267
D) $6,112

Question

Elliott 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 $1,000 and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | } 
\hline \text { Rent and utilities } & \$ 1,240 \
\hline \text { Wages and benefits to luthier } & 2,600 \
\hline \text { Other expenses } & 800 \
\hline
\end{array}$$ Elliott's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.90 went to cover his fixed costs,and that anything past that point was pure profit.
Elliott wishes to earn $5,500 of operating profit each month.Calculate the amount of sales revenue required to achieve the target profit.
A) $4,640
B) $5,500
C) $11,267
D) $6,112

Quizplus · Accepted Answer

The contribution margin ratio is 0.90, meaning 90% of sales revenue goes towards covering fixed costs and the desired profit. The fixed costs total $1,240 + $2,600 + $800 = $4,640. To find the sales revenue needed to achieve a $5,500 profit, add the fixed costs to the desired profit ($4,640 + $5,500 = $10,140) and divide by the contribution margin ratio (0.90). This gives a required sales revenue of $10,140 / 0.90 = $11,266.67, which rounds to $11,267.

Elliott Was a Professional Classical Guitar Player Until His Motorcycle