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jerico jerico
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Karen Hefner, a florist, 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.
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Cost Accounting


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cyborgcyborg
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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 × $30 × 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 × $30 × 800) = $9,600

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
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