Question

Karen Hefner, a florist, operates retail stores in several she " , a tlorist, operates retail stores in several shopping malls. The average selling price of an arrangement is $30 and the average cost of each sale is $18. A new mall is opening where Karen wants to locate a store, but the location manager is not sure about the rent method to accept. The mall operator offers the following three options for its retail store rentals: 1. paying a fixed rent of $15,000 a month, or 2. paying a base rent of $9,000 plus 10% of revenue received, or 3. paying a base rent of $4,800 plus 20% of revenue received up to a maximum rent of $25,000. Required: a. For each option, compute the breakeven sales and the monthly rent paid at break- even. b. Beginning at zero sales, show the sales levels at which each option is preferable up to 5,000 units.

Answer 1

(a)Option 1 N = Breakeven units

$30N –$18N - $15,000 = 0

$12N –$15,000 = 0

N = $15,000/$12 = 1,250 units

Rent at breakeven = $15,000

Option 2 N = Breakeven units

$30N –$18N –0.10($30N) –$9,000 = 0

$9N –$9,000 = 0

N = $9,000/$9 = 1,000 units

Rent at breakeven = $9,000 + (0.10 x $30 x 1,000) = $12,000

Option 3 N = Breakeven units

$30N –$18N –0.20($30N) –$4,800 = 0

$6N –$4,800 = 0

N = $4,800/$6 = 800 units

Rent at breakeven = $4,800 + (0.20 x $30 x 800) = $9,600s

(b) Option 3 from 0 to 1,400 units for $4,800 plus $6 per unit.

Option 2 from 1,401 to 2,000 for $9,000 plus $3 per unit.

Option 1 above 2,000 for $15,000.

Option 1 equals Option 2 when sales are 2,000 and favors Option 1 above 2,000 units.

$15,000 = $9,000 + 0.10($30N); $6,000 = $3N; N = 2,000

Option 1 equals Option 3 when sales are 1,700 and favors Option 1 above 1,700 units.

$15,000 = $4,800 + 0.20($30N); $10,200 = $6N; N = 1,700 units