Colin Was a Professional Classical Guitar Player Until His Motorcycle

question 84

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: $$\begin{array} { | l | r | } \hline \text { Rent and utilities } & \$ 1,210 \\\hline \text { Wages and benefits to luthier } & 2,500 \\\hline \text { Other expenses } & 480 \\\hline\end{array}$$ Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales, $0.65 went to cover his fixed costs, and that anything past that point was pure profit.
Colin wishes to earn $4,000 of operating profit each month. Calculate the number of guitars Colin will have to sell to achieve the target profit.

• A) 39 guitars
• B) 33 guitars
• C) 15 guitars
• D) 18 guitars

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Definitions:

End of the period

Refers to the conclusion of an accounting period, at which financial statements are prepared.

Net realizable value

The estimated selling price of goods, minus the cost of their sale or disposal.

Damaged merchandise

Goods that have been physically harmed or impaired, reducing their value or usefulness.

Below cost

describes selling a product at a price less than its production or acquisition cost, often to clear inventory or attract customers.