Ethan was a professional classical guitar player until a motorcycle accident left him disabled

Question

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 $600, and the fixed monthly operating costs are as follows:

Rent and utilities $600
Wages and benefits to luthier 2,200
Other expenses 470

Ethan's accountant told him about contribution margin ratios, and Ethan understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit.
Ethan wishes to earn $5,000 of operating profit each month. Calculate the amount of sales revenue required to achieve the target profit. (Round your answer to the nearest dollar.)
A) $5,450
B) $8,175
C) $13,784
D) $20,675

Answer 1

C .C) Required sales in dollars = (Fixed costs + Target profit) / Contribution margin ratio
Contribution margin ratio = 60%
Total fixed costs = $600 + $2,200 + $470 = $3,270
Target profit = $5,000
Required sales in dollars = ($3,270 + $5,000 ) / 60% = $13,784