Question

Problem 2: Changing Cost Structures Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling price of an arrangement is $70 and the average cost of each 15 50. She also pays a manager $8 000 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 $25,000 a month, or 2. paying a base rent of $10.000 plus 15% of revenue received, or 3. paying a base rent of $7.000 plus 15% of revenue received Required: Calculate the selling price per unit under each option. Calculate the variable cost per unit under each option. Calculate the total fixe cost under 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 T Option 2 Option 3 Selling Price Per Unit Variable Cost Per Unit Total Fixed Costs Break-Even in Units Net Income Problem 3: Changing Prices

Answer 1

Problem 2:

Part 1:
	Option 1	Option 2	Option 3
Selling Price Per Unit	70	70	70
Variable Cost Per Unit	50	50+(70*15%)=60.5	60.5
Contribution per unit	20	9.5	9.5
Total Fixed Costs	8000+25000=33000	18000	15000
Break-Even in Units = FC / Contr.	33000/20 = 1650	18000/9.5 = 1895	15000/9.5 = 1579
Net Income on 5000 units sold	(5000*20)-33000= 67000	(5000*9.5)-18000 = 29500	(5000*9.5)-15000= 32500
Part 2:
Option 1 should be choosen as the highest contribution per unit and Net Income on 5000 units.