Ajax was a professional classical guitarist until a motorcycle accident left him

Question

Ajax was a professional classical guitarist 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 $800, and the fixed monthly operating costs are as follows: Rent and utilities Wages and benefits to luthier Other expenses $600 2,300 479 Ajax's accountant told him about contribution margin ratios, and Ajax understood clearly that for every dollar of sales, S0 60 went to cover his fixed costs, and anything above that point was profit. How many guitars does Ajax need to sell each month to break even? (Round your answer up to the nearest whole guitar.) A. 5 guitars B. 8guitas C.7 guitars D. 3 guitas

Explanation / Answer

The Answer is C - 7 GUITARS

Computation

Break Even Point in Units = Fixed costs / Contribution margin per unit

Total fixed costs = $ 600 + $ 2300 + $ 479 = $ 3379

Contribution margin per unit = $ 800 × 0.60 = $ 480

Break Even Point in Units = $ 3379 / $ 480 = 7 Guitars

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