Brad was a professional classical guitar player until a motorcycle accident at 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 each, and the fixed monthly operating costs are as follows:
Rent and utilities $810
Wages and benefits to luthier 2,520
Other expenses 480
Brad's accountant told him about contribution margin ratios, and Brad understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
Brad is planning to increase the sales price to $820. What impact will the increase in sales price have on the breakeven point in units? (Round your answer up to the nearest whole guitar.)
A) It will stay the same.
B) It will go down from 12 to 8 units.
C) It will go up from 8 to 12 units.
D) It will go down from 10 to 8 units.
D .D) Contribution margin per unit = $700 x 0.60 = $420
Total fixed costs = $810 + $2,520 + $480 = $3,810
Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Required sales in units = ($3,810 + 0 ) / $420 = 10 units
Revised contribution margin = $420 + ($820 - $700 ) = $420 + $120 = $540
Required sales in units (Revised) = ($3,810 + 0 ) / $540 = 8 units
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