ColorColor Rugs is holding a? 2-week carpet sale at Jacob\'sJacob\'s ?Club, a lo
ID: 2552211 • Letter: C
Question
ColorColor
Rugs is holding a? 2-week carpet sale at
Jacob'sJacob's
?Club, a local warehouse store.
ColorColor
Rugs plans to sell carpets for
$ 1 comma 000$1,000
each. The company will purchase the carpets from a local distributor for
$ 400$400
?each, with the privilege of returning any unsold units for a full refund.
Jacob'sJacob's
Club has offered
ColorColor
Rugs two payment alternatives for the use of space.
times•
Option? 1: A fixed payment of
$ 17 comma 400$17,400
for the sale period
times•
Option? 2:
2020?%
of total revenues earned during the sale periodAssume
ColorColor
Rugs will incur no other costs.Read the requirements
.
Calculate the breakeven point in units for? (a) option 1 and? (b) option 2.
2.
ColorColor
ColorColor
ColorColor
3.
8787
4.
Briefly explain and interpret your answer to requirement 3.
.
Requirement 1. Calculate the breakeven point in units for? (a) option 1 and? (b) option 2.
Begin by determining the formula to calculate the breakeven point in units.
Number of units to breakeven
?=
Fixed cost
Contribution margin per unit
Calculate the breakeven point in units for option? 1, then option 2. ?(Round your answers up to the nearest whole number. Enter? "0" for zero? balances.)
Units
(a) Option 1
(b) Option 2
.
Calculate the breakeven point in units for? (a) option 1 and? (b) option 2.
2.
At what level of revenues willColorColor
Rugs earn the same operating income under either? option? a. For what range of unit sales willColorColor
Rugs prefer option? 1? b. For what range of unit sales willColorColor
Rugs prefer option? 2?3.
Calculate the degree of operating leverage at sales of8787
units for the two rental options.4.
Briefly explain and interpret your answer to requirement 3.
Explanation / Answer
Requirement 1 Calculation of break even point option 1 =fixed rent/(contribution per unit) =$17,400/($1,000-$400) 29 Units option 2 =fixed rent/(contribution per unit) =0/($1,000-$200-$400) 0 units Requirement 2 let assume no. of units sold being "x" x*$600-$17,400=x*$400 Therefor x = 87 units Hence at sales of 87 units operating income will be same under both the options a. color rugs prefer option 1 when sales is more than 87 units as veriable cost is lower. b. color rugs prefer option 2 when sales is less than 87 units as fixed cost is lower. Requirement 3 Calculation of degree of operating leverage at sale volume of 87 units option 1 option 2 sales $ 87,000 $ 87,000 variable cost $ 34,800 $ 52,200 Contribution $ 52,200 $ 34,800 fixed cost $ 17,400 $ - Net operating income $ 34,800 $ 34,800 Operating leverage 150% 100% Requirement 4 Operating leverage indicate the dgree to which a firm incures a combination of fixed cost and variable cost. High degree of operating leverage indicate high fixed cost burden and Low degree of operating leverage indicate low fixed cost burden. As we can see option 1 has more fixed cost burden than option 2 that is why opetion 1 has High operating leverage.