Hisham was a professional classical guitar player 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 $900, and the fixed monthly operating costs are as follows:
Rent and utilities $800
Wages and benefits to luthier 2,000
Other expenses 474
Hisham's accountant told him about contribution margin ratios, and Hisham understood clearly that for every dollar of sales, $0.65 went to cover his fixed costs, and anything above that point was profit.
Hisham wishes to earn $4,000 of operating profit each month. Calculate the number of guitars Hisham will need to sell to achieve the target profit. (Round your answer up to the nearest whole guitar.)
A) 3 guitars
B) 12 guitars
C) 4 guitars
D) 13 guitars
D .D) Required sales in units = (Fixed costs + Target profit) / Contribution margin per unit
Contribution margin per unit = $900 x 0.65 = $585
Total fixed costs = $800 + $2,000 + $474 = $3,274
Target profit = $4,000
Required sales in units = ($3,274 + $4,000 ) / $585 = 13 guitars
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