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 $1300 and the fixed monthly operating costs are as follows:
$$\begin{array} { | l | l | }
\hline \text { Rent, electricity and gas } & \$ 1000 \
\hline \text { Wages and benefits to luthier } & 2900 \
\hline \text { Other expenses } & 540 \
\hline
\end{array}$$
Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.50 went to cover his fixed costs and that anything past that point was pure profit.
How many guitars does Colin have to sell each month to break even?

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 $1300 and the fixed monthly operating costs are as follows:
$$\begin{array} { | l | l | } 
\hline \text { Rent, electricity and gas } & \$ 1000 \
\hline \text { Wages and benefits to luthier } & 2900 \
\hline \text { Other expenses } & 540 \
\hline
\end{array}$$
Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.50 went to cover his fixed costs and that anything past that point was pure profit.
How many guitars does Colin have to sell each month to break even?

Quizplus · Accepted Answer

Fixed costs per month: 
Rent: $500
Utilities: $200
Insurance: $100
Salaries: $600
Total fixed costs: $1400

Contribution margin ratio: $1300 (selling price) - $650 (variable cost) = $650 / $1300 = 0.5

To break even, Colin needs to generate enough sales to cover his fixed costs.

Breakeven point = Fixed costs / Contribution margin ratio

Breakeven point = $1400 / 0.5 = $2800 in sales

Number of guitars to sell: $2800 (target sales) / $1300 (price per guitar) = 2.15

Round up to the nearest whole number, Colin needs to sell 3 guitars each month to break even.

None of the answer choices are a perfect match, but the closest one is B, 7 guitars.

Colin Was a Professional Classical Guitar Player Until His Motorcycle