Color Rugs is holding a two-week carpet sale at Jerry's Club, a local warehouse store. COlor Rugs plan to sell carpets for 500 each. The company will purchase the carpets from a local distributer for 350 dollars each, with the privilege of returning any unsold units for a full refund. Jerry's Club has offered Color Rugs two payment alternatives for the use of space.

Option 1: A fixed payment of 5,000 for the sale period
Option 2: 10 percent of total revenues earned during the sale period.
Assume color rugs will incur no other costs.
1. Calcuate the break even ponts for option a and b
2. At what level of revenues will color rugs earn the same operating income under either option?
A. For what range of unit sales will color rugs prefer option 1?
B. For what range of unit sales will color rugs prefer option 2?
3. Calculate the degree of operating leverage at sales of 100 units for the two rental options
4. Briefly explain and interpret your answer to requirement 3.

1. Total cost is space added with cost of rugs.
a. 5000 + 350x

Total revenue = 500x

Break even point is when revenue = costs.

Make an equation for the second option.

2. Take both income equations from above and solve for x.
a. Find where the income is higher.
b. This will be the "opposite" of a.

3. Use your DOL formulae for that part.

4. That is for you to work out. What do you get?