Elliott Was a Professional Classical Guitar Player Until His Motorcycle

question 221

Multiple Choice

Elliott 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 $1,000 and the fixed monthly operating costs are as follows: $$\begin{array} { | l | r | } \hline \text { Rent and utilities } & \$ 1,240 \\\hline \text { Wages and benefits to luthier } & 2,600 \\\hline \text { Other expenses } & 800 \\\hline\end{array}$$ Elliott's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.90 went to cover his fixed costs,and that anything past that point was pure profit.
Elliott wishes to earn $5,500 of operating profit each month.Calculate the amount of sales revenue required to achieve the target profit.

• A) $4,640
• B) $5,500
• C) $11,267
• D) $6,112

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Definitions:

Purchasing Agent

An individual or company responsible for buying goods and services for another company or organization.

Fixed Overhead Volume Variance

Fixed overhead volume variance is the difference between the budgeted and actual volume of production, multiplied by the fixed overhead rate, indicating efficiency in production volume.

Predetermined Fixed Overhead Rate

A rate used to allocate fixed overhead costs to produced goods, based on estimated costs and activity levels.

Denominator Activity

The level of activity used to allocate fixed costs in a costing system.