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.)
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:
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.
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.
D) It will go down from 10 to 8 units.
Contribution margin per unit = $700 × 0.60 = $420
Total fixed costs = $810 + $2520 + $480 = $3810
Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Required sales in units = ($3810 + 0) / $420 = 10 units
Revised contribution margin = $420 + ($820 - $700) = $420 + $120 = $540
Required sales in units (Revised) = ($3810 + 0) / $540 = 8 units
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