Colin Was a Professional Classical Guitar Player Until a Motorcycle

question 8

Multiple Choice

Colin 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 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.
Colin is planning to increase the selling price to $750.What impact will the increase in selling price have on the contribution margin ratio?

• A)It will stay the same.
• B)It will go up 70% to 75%.
• C)It will go up from 60% to approximately 63%.
• D)It will go down from 70% to approximately 67%.

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Definitions:

Average Cost Formula

A method used in accounting to calculate the cost of sold goods or services by dividing the total cost of goods available for sale by the total number of items available.

Ending Inventory

The total value of all goods available for sale at the end of an accounting period, used in calculating the cost of goods sold and determining profitability.

FOB Destination

A shipping term indicating that the seller bears the shipping costs and maintains ownership until the goods reach the buyer's location.

FOB Shipping Point

A term used in shipping contracts to indicate that the buyer assumes responsibility for the goods and the shipping costs from the point of departure.