Question

Problem 2: Changing Cost Structures (28 points) 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. She also pays a manager $5,000 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 $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 Required: Determine the selling price per unit, variable cost per unit and total fixed costs for each option. Calculate the break-even in units under each option. Calculate the net income under each option assuming that units sold are 5,000. • Which option should Karen choose? Support your answer. Option 1 Option 2 Option 3 Selling Price Per Unit Variable Cost Per Unit Total Fixed Costs Break-Even in Units Net Income

Can you help with Option 1 and 2 and I can figure out Option 3?

Answer 1

Karen Hefner: ($)

	Option 1	Option 2	Option 3
Selling price (SP)	30	30	30
Variable cost (VC)	18	18+10%(30) = 21	18+20%(30) = 24
Contribution per unit (C=SP-VC)	12	9	6
Total fixed cost (FC)	5000+15,000 = 20,000	5000+9000 = 14,000	5000+4800 = 9,800
Break even point (FC/C)	20,000/12 = 1,667 Units	14,000/9 = 1,556 units	9,800/6 = 1,633 units
Net income (5000 units × C - FC)	(5000×12)-20,000 = 40,000	(5000×9)-14,000 = 31,000	(5000×6)-9800 = 20,200

Break even point = Fixed cost / Contribution per unit

Net income = (Units sold × Contribution per unit) - Fixed cost

In the above options the store should opt for option 1 because of the huge income than other options.