Question

Curt Rugs is holding a​ 2-week carpet sale at Jacob's ​Club, a local warehouse store. Curt Rugs plans to sell carpets for $800 each. The company will purchase the carpets from a local distributor for $560 each, with the privilege of returning any unsold units for a full refund. Jacob's Club has offered Curt Rugs two payment alternatives for the use of space.

Option​ 1: A fixed payment of $8,640 for the sale period

Option​ 2: 15​% of total revenues earned during the sale period

Assume Curt Rugs will incur no other costs.

REQUIREMENTS

1. Calculate the breakeven point in units for (a) option 1 and (b) option 2

2. At what level of revenues will curt rugs earn the same operating income under either option?

a. For what range of unit sales will Curt rugs prefer option 1?

b. For what range of unit sales will Curt Rugs prefer option 2?

3. Calculate the degree of operating leverage at sales of 72 units for the two rental options.

4. Briefly explain and interpret your answer to requirement 3

Please show any work to help

Answer 1

	Option 1	Option 2
Selling price per carpet	800	800
Variable cost per unit	560	680
Contribution margin per unit	240	120
Fixed costs	8640	0
Break even point = Fixed costs/Contribution margin per unit	36	0
2.Level of same operating income = (Difference in Fixed costs)/Difference in contribution margin per unit	72	units
a. For sales above 72 units, option 1 will be preferred
b.For sales upto 72 units, option 2 will be preferred
DOL = Contribution Margin/Operating Income
Option 1	2.00	times
Option 2	1.00	times
4.For every change increase in Sales, Operating income will change by 2 times % change in sales under Option 1
4.For every change increase in Sales, Operating income will change by same % change in sales under Option 2