Slate Was a Professional Classical Guitar Player Until a Motorcycle

question 37

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: $$\begin{array} { | l | r | } \hline \text { Rent and utilities } & \$ 810 \\\hline \text { Wages and benefits to luthier } & 2520 \\\hline \text { Other expenses } & 480 \\\hline\end{array}$$ 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.

---

Definitions:

Target Capital Structure

The mix of debt, preferred stock, and common equity that a company aims to hold to minimize its cost of capital and maximize its market value.

Forecasted Net Income

Forecasted net income is an estimate of a company's future profits after all expenses and taxes have been subtracted from revenues.

Total Dividends

The sum of all dividend payments made by a company to its shareholders over a specified period, usually a fiscal year.

Residual Dividend Policy

A policy wherein dividends are based on the earnings left over after all operating expenses and expansion projects are funded.