Pheonix was a professional classical guitar player until a motorcycle accident l

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:

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?

It will stay the same.

It will increase to 53.33%.

It will increase to approximately 62.67%.

It will decrease to approximately 49.33%

Explanation / Answer

Contribution margin ratio will increase to approximately 62.67% because when variable cost when sales price is 700 is 40% of sales price that is 280.When sales price increased to 750 variable cost remains 280and contribution is 750-280=$ 470.

contribution margin ratio =contribution/sales price*100=470/750*100=62.67%

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