Question

Pheonix 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 $700​, and the fixed monthly operating costs are as​ follows:

Rent and utilities	$800
Wages and benefits to luthier	2,500
Other expenses	480

​Pheonix'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 anything above that point was profit. Pheonix is planning to increase the sales price to $750. What impact will the increase in sales price have on the contribution margin​ ratio?

A.

It will stay the same.

B.It will increase to

53.33​%.

C.It will increase to approximately

62.67​%.

D.It will decrease to approximately

49.33​%.

Answer 1

As for every dollar of​ sales, ​$0.60 went to cover his fixed​ costs

Coontribution Margin per unit = Sales Price x 60%
                                          = 700 x 60 %
                                          = $420 per Unit

If Sales is increased from $700 to $750 means $50 increase in sales price,
Contribution Margin per unit also increases by $50

So New Contribution Margin per unit = $420 + 50 = $470
     New Sales Price = $750

Hence, New Contribution Margin Ratio = Contribution Margin per unit / New Sales Price
                                                        = $470 / $750
                                                        = 62.67%

Hence (C) It will increase to approximately 62.67​% is Right Answer