Eric 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 $750 and the fixed monthly operating costs are as follows:

Eric'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 Eric should earn each month to break even?
A)$10,750
B)$7,167
C)$5,167
D)$6,334

Question

Eric 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 $750 and the fixed monthly operating costs are as follows:

Eric'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 Eric should earn each month to break even?
A)$10,750 
B)$7,167 
C)$5,167 
D)$6,334

Quizplus · Accepted Answer

B)Required sales in dollars = (Fixed costs + Target profit)/ Contribution margin ratio
Contribution margin ratio = 60%
Total fixed costs = $1,200 + $2,600 + $500 = $4,300
Required sales in dollars = ($4,300 + 0)/ 60% = $7,167

Eric Was a Professional Classical Guitar Player Until His Motorcycle