Question

Martin 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$700​,

and the fixed monthly operating costs are as​ follows:

Rent and utilities	$ 800
Wages and benefits to luthier	2500
Other expenses	479

​Martin's accountant told him about contribution margin​ ratios, and Martin understood clearly that for every dollar of​ sales,

​$0.65

went to cover his fixed​ costs, and anything above that point was profit.Martin wishes to earn

$ 3500

of operating profit each month. Calculate the number of guitars Martin will need to sell to achieve the target profit.​ (Round your answer up to the nearest whole​ guitar.)

A.

66

guitars

B.

16

guitars

C.

4

guitars

D.

15

guitars

Answer 1

Contributionmargin ratio = 0.65 i.e. 65%
Contribution margin per guitar = $700*65% =
	=$455
Fixed Costs = $800+2500+479
=$3779
Desired Profit = $3500
Therefore the number of guitars must be sold to earn $3500
= (fixed cost + desired profit )/ contribution margin per unit
=($3779+3500)/455
=16 Guitars
Correct Option: B