onix was a professional classical guitar player until a motorcycle accident left

Question

onix was a professional classical guitar player until a motorcycle accident left him disabled. After long months of therapy, he hired an experienced luthier and rted a small shop to make and sell Spanish guitars. The guitars sell for $705, and the fixed monthly operating costs are as follows nt and utilities ages and benefits to luthier 2,520 ther expenses 480 heonix's accountant told him about contribution margin ratios, and Pheonix understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and nything above that point was profit Pheonix is planning to increase the sales price to $780. What impact will the increase in sales price have on the contribution margin ratio? o A. It will increase to approximately 63.85%. O B. It will decrease to approximately 44 62% O C. It will stay the same. 0 D. It will increase to 50.38%.

Explanation / Answer

Variable cost ratio

= 1 – Contribution margin ratio

= 1 – 0.60

= 0.40

So, Variable costs

= Current selling price x Variable cost ratio

= $705 x 0.40

= $282 per unit

New Contribution

= New selling price – Variable costs

= $780 - $282

= $498 per unit

Contribution margin ratio

= Contribution / New Selling price

= $498 / $780

= 0.6385 or 63.85%

So, the new contribution margin ratio will be 63.85%

So, option A is the correct option

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