Colin was a professional classical guitarist 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 $900, and the fixed monthly operating costs are as follows:
Rent and utilities $700
Wages and benefits to luthier 2,000
Other expenses 475
Colin's accountant told him about contribution margin ratios, and Colin understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
What is the amount of revenue Colin should earn each month to break even? (Round your answer to the nearest dollar.)
A) $7,938
B) $5,292
C) $4,500
D) $4,125
B .B) Required sales in dollars = (Fixed costs + Target profit) / Contribution margin ratio
Contribution margin ratio = 60%
Total fixed costs = $700 + $2,000 + $475 = $3,175
Required sales in dollars = ($3,175 + 0 ) / 60% = $5,292
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