Colin Was a Professional Classical Guitar Player Until His Motorcycle

Colin was a professional classical guitar player until his motorcycle accident that left him disabled. After long months of therapy, he hired an experienced luthier (maker of stringed instruments) 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: Colin's accountant told him about contribution margin ratios and he understood clearly that for every dollar of sales, $0.60 went to cover his fixed costs, and that anything past that point was pure profit. Colin is planning to increase the selling price to $750. What impact will the increase in selling price have on the contribution margin ratio?

A) It will stay the same.
B) It will go up 70% to 75%.
C) It will go up from 60% to approximately 63%.
D) It will go down from 70% to approximately 67%.

Correct Answer:

Verified

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