Steven was a professional classical guitar player until his motorcycle accident

Question

Steven 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 $800 and the fixed monthly operating costs are as follows: Steven's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales. $0.65 went to cover his fixed costs, and that anything past that point was pure profit. Steven wishes to earn $6,000 of operating profit each month. Calculate the number of guitars Steven will have to sell to achieve the target profit.

Explanation / Answer

Contribution margin = .65

Operating expenses 4240

Profit to be earned = 6000

Value of sales required to earn a profit of 6000= fixed cost+profit to be recovered/ contribution margin

4240+6000/.65 = 15753.84 to be required to earn a profit of 6000

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