Please show work. Thanks. Karen Hefner, a florist, operates retail stores in sev
ID: 2506119 • Letter: P
Question
Please show work. Thanks.
Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling price of an arrangement is $50 and the average cost of each sale is $30. She also pays a manager $7,500 per month. 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 $17,500 a month, or
2. paying a base rent of $10,000 plus 10% of revenue received, or
3. paying a base rent of $5,500 plus 20% of revenue received
Required:
Explanation / Answer
UNITS SOLD=5000
TOTAL SELLING PRICE= 50*5000= 250000
TOTAL COST = 30*5000= 150000
MANAGERS PAY =7500
TOTAL INCOME= TOTAL SELLING PRICE- (TOTAL COST+MANAGERS PAY + RENT)
1) RENT= 17500 HENCE TOTAL INCOME=$ 75000
2) RENT=10000 + (0.1 * 250000) = 35000 HENCE TOTAL INCOME= 57500
3)RENT= 5500+ (0.2*250000) = 55000 HENCE TOTAL INCOME=37500
OPTION 1 SHOULD BE CHOSEN BY KAREN AS IT HAS MAXIMUM PROFIT.