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 $740 and the fixed monthly operating costs are as follows:
$$\begin{array} { | l | l | }
\hline \text { Rent, electricity and gas } & \$ 850 \
\hline \text { Wages and benefits to luthier } & 3000 \
\hline \text { Other expenses } & \$ 20 \
\hline
\end{array}$$
Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.70 went to cover his fixed costs,and that anything past that point was pure profit.
Colin is planning to increase the selling price to $850.What impact will the increase in selling price have on the breakeven point in units?

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 $740 and the fixed monthly operating costs are as follows:
$$\begin{array} { | l | l | } 
\hline \text { Rent, electricity and gas } & \$ 850 \
\hline \text { Wages and benefits to luthier } & 3000 \
\hline \text { Other expenses } & \$ 20 \
\hline
\end{array}$$
Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.70 went to cover his fixed costs,and that anything past that point was pure profit.
Colin is planning to increase the selling price to $850.What impact will the increase in selling price have on the breakeven point in units?

Quizplus · Accepted Answer

The increase in selling price increases the contribution margin per unit, thus reducing the number of units needed to cover fixed costs, lowering the breakeven point.

Colin Was a Professional Classical Guitar Player Until His Motorcycle