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 $720 and the fixed monthly operating costs are as follows:
$$\begin{array} { | l | l | }
\hline \text { Rent and electricity and gas } & \$ 1400 \
\hline \text { Wages and benefits to luthier } & 2500 \
\hline \text { Other expenses } & 300 \
\hline
\end{array}$$
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.
What is the amount of revenue Colin should earn 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 $720 and the fixed monthly operating costs are as follows:
$$\begin{array} { | l | l | } 
\hline \text { Rent and electricity and gas } & \$ 1400 \
\hline \text { Wages and benefits to luthier } & 2500 \
\hline \text { Other expenses } & 300 \
\hline
\end{array}$$
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.
What is the amount of revenue Colin should earn each month to break even?

Quizplus · Accepted Answer

The contribution margin ratio is 0.60, which means that for every dollar of sales, $0.60 goes to cover fixed costs. To break even, Colin needs to earn enough revenue to cover his fixed costs, which are $1400 + $2500 + $300 = $4200. To find the amount of revenue Colin needs to earn each month to break even, we divide the fixed costs by the contribution margin ratio: $4200 / 0.60 = $7000. However, the guitars sell for $720, so Colin needs to sell 7000/720 = 9.72 guitars each month to break even. Since he cannot sell a fraction of a guitar, he needs to sell 10 guitars each month to break even. Therefore, the amount of revenue Colin should earn each month to break even is 10 * $720 = $7200.

Colin Was a Professional Classical Guitar Player Until His Motorcycle