Pheonix Was a Professional Classical Guitar Player Until a Motorcycle

question 26

Multiple Choice

Pheonix 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: $$\begin{array} { | l | r | } \hline \text { Rent and utilities } & \$ 810 \\\hline \text { Wages and benefits toluthier } & 2500 \\\hline \text { Other expenses } & 480 \\\hline\end{array}$$ Pheonix's accountant told him about contribution margin ratios, and Pheonix understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
Pheonix is planning to increase the sales price to $750. What impact will the increase in sales price have on the contribution margin ratio?

• A) It will stay the same.
• B) It will increase to 53.33%.
• C) It will increase to approximately 62.67%.
• D) It will decrease to approximately 49.33%.

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Definitions:

Partnership

A legal form of business operation between two or more individuals who share management and profits.

Corporation

A legal entity that is separate from its owners, offering limited liability to its shareholders, and is capable of entering contracts, suing and being sued.

Account Payable

The sum of funds that a business needs to pay back to its vendors or lenders for products or services bought on a credit basis.

Account Receivable

Debts owed by customers to a company for items or services that have been dispatched but not compensated.