Phoenix 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 $705,and the fixed monthly operating costs are as follows: Rent and utilities$810Wages and benefits to luthier$2,510Other expenses$480 Phoenix's accountant told him about contribution margin ratios, and Phoenix understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit. Phoenix is planning to increase the sales price to $760.What impact will the increase in sales price have on the contribution margin ratio?

Name: Phoenix was a professional classical guitar player until a motorcycle
Uploaded: 2024-03-20T06:33:06.000Z
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Description: Phoenix 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 $705,and

Contribution margin ratio refers to the computation of ratios which calculates the percentage of contribution margin (fixed expenses, or sales minus variable expenses) in relation to the net sales of the company in percentage terms. Computing the following requirements: Particulars Amount New selling price (A) $760 Less: Variable cost ($700×40%) $280 New Contribution Margin (B) $480 New Contribution Margin Ratio (BA) 63.16% Therefore, The Contribution Margin ratio of Phoenix will increase by 63.16% when the sale price is increased to $760 earlier to $700, which is a good sign for the company. Working Note: $0.60 covers the fixed costs which means 60% is the Contribution Margin, means 40% is the variable cost and it will remain at 40% of $700 itself.

Answered: Phoenix was a professional classical…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Phoenix 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 $705,and the fixed monthly operating costs are as follows:

Rent and utilities	$810
Wages and benefits to luthier	$2,510
Other expenses	$480

Phoenix's accountant told him about contribution margin ratios, and Phoenix understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and anything above that point was profit. Phoenix is planning to increase the sales price to $760.

What impact will the increase in sales price have on the contribution margin ratio?

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