Slate Was a Professional Classical Guitar Player Until a Motorcycle

question 12

Multiple Choice

Slate 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: $$\begin{array} { | l | r | } \hline \text { Rent and utilities } & \$ 810 \\\hline \text { Wages and benefits toluthier } & 2520 \\\hline \text { Other expenses } & 480 \\\hline\end{array}$$ Slate's accountant told him about contribution margin ratios, and Slate understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
Slate 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.

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Definitions:

Spot Rate

The current market price at which a particular currency can be bought or sold for immediate delivery.

Relative PPP

Relative Purchasing Power Parity, a theory which states that exchange rates between currencies change to compensate for inflation rate differences among countries.

Inflation

How quickly the average cost of goods and services goes up, resulting in reduced purchasing capacity.

Real Rate

The interest rate or rate of return on an investment after adjusting for inflation, representing the actual purchasing power of earnings.