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:
$$\begin{array} { | l | l | }
\hline \text { Rent and electricity and gas } & \$ 1210 \
\hline \text { Wages and benefits to luthier } & 3100 \
\hline \text { Other expenses } & 600 \
\hline
\end{array}$$
Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.85 went to cover his fixed costs,and that anything past that point was pure profit.
Colin wishes to earn $5100 of operating profit each month.Calculate the amount of sales revenue required to achieve the target profit.

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:
$$\begin{array} { | l | l | } 
\hline \text { Rent and electricity and gas } & \$ 1210 \
\hline \text { Wages and benefits to luthier } & 3100 \
\hline \text { Other expenses } & 600 \
\hline
\end{array}$$
Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.85 went to cover his fixed costs,and that anything past that point was pure profit.
Colin wishes to earn $5100 of operating profit each month.Calculate the amount of sales revenue required to achieve the target profit.

Quizplus · Accepted Answer

The contribution margin per guitar can be calculated as follows:
$700 - ($700 x 0.85) = $105
This means that for every guitar Colin sells, $105 goes toward covering his fixed costs and increasing his operating profit.
To achieve his target operating profit of $5100, Colin needs to sell:
$5100 ÷ $105 = 48.57 (rounded up to 49) guitars
Therefore, the sales revenue required to achieve the target profit is:
49 x $700 = $34,300
Therefore, the correct answer is B: $11,777.

Colin Was a Professional Classical Guitar Player Until His Motorcycle