Luca was a professional classical guitar player until a motorcycle accident left him disabled
After long months of therapy, he hired an experienced luthier 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:
Rent and utilities $810
Wages and benefits to luthier 2,500
Other expenses 480
Luca's accountant told him about contribution margin ratios, and Luca understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
Luca is planning to increase the sales price to $750. What impact will the increase in sales price have on the contribution margin ratio?
A) It will stay the same.
B) It will increase to 53.33%.
C) It will increase to approximately 62.67%.
D) It will decrease to approximately 49.33%.
C .C) Contribution margin per unit = $700 x 0.60 = $420
Contribution margin ratio = ($470 / $750 ) x 100 = 0.6267
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