Colin Was a Professional Classical Guitar Player Until His Motorcycle

question 45

Multiple Choice

Colin 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 $740 and the fixed monthly operating costs are as follows:
$$\begin{array} { | l | l | } \hline \text { Rent, electricity and gas } & \$ 850 \\\hline \text { Wages and benefits to luthier } & 3000 \\\hline \text { Other expenses } & \$ 20 \\\hline\end{array}$$
Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales,$0.70 went to cover his fixed costs,and that anything past that point was pure profit.
Colin is planning to increase the selling price to $850.What impact will the increase in selling price have on the breakeven point in units?

• A) It will go down from 11 to 9 units.
• B) It will stay the same.
• C) It will go up from 9 to 12 units.
• D) It will go down from 9 to 7 units.

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Definitions:

Schedule D Transactions

Refers to a tax form used in the U.S. to report capital gains and losses from the sale, exchange, or disposition of capital assets.

MACRS

Modified Accelerated Cost Recovery System, a method of depreciation in the U.S. for tax purposes, allowing faster recovery of investments in certain property through depreciation deductions.

Depreciable Real Property

Real estate eligible for depreciation for tax purposes, meaning its cost can be deducted over a period of time.

Straight-Line Method

A method of calculating the depreciation of an asset that evenly spreads out its cost over its useful life.