Colin Was a Professional Classical Guitar Player Until His Motorcycle

question 37

Multiple Choice

Colin 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 $700 and the fixed monthly operating costs are as follows: Colin'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. How many guitars does Colin have to sell each month to break even?

• A)6 guitars
• B)14 guitars
• C)7 guitars
• D)9 guitars

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Definitions:

Depreciation

The accounting method of allocating the cost of a tangible asset over its useful life.

Operating Leverage

A measure of how sensitive a company's operating income is to changes in revenue.

Marginal Tax Rate

The rate of tax applied to the next dollar of taxable income, indicating how much tax will be paid on an additional dollar earned.

Operating Cash Flow

A measure of the cash generated by a company's normal business operations.