[neversatysfyd]

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. A new mall is opening where she 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 method.
1. paying a fixed rent of 15000 a month
2. paying a base rent of $9000 plus 10% of revenue received
3. paying a base rent of $4800 plus 20% of revenue received up to a maximum rent of $25000

a. for each option compute the break even sales and the monthly rent paid at break even
b. beginning at zero sales show the sales levels at which each option is preferable up to 5000 units

So... do I just figure out what the actual revenue is on a sale, which is $12.
a. 15000/12=1250 which gives me the break even units... so how do I figure out break even for rent?

I have no clue how to do part b or 2 and 3 of a. HELP!

[morgaine300]

So... do I just figure out what the actual revenue is on a sale, which is $12.

Learn the terminology so that you know what the book and problems (and us) are talking about - and so we know what you're talking about too. The "actual revenue" is the $30. The $12 is called contribution margin and is a very important part of doing cost behavior analysis, so you need to know the term and what exactly it is.

a. 15000/12=1250 which gives me the break even units... so how do I figure out break even for rent?

This is correct. And you don't figure out break-even for a specific expense. You're including that expense into the entire break-even analysis. Break-even is for the sales -- how many units you need to sell in order to break even. It can also be quoted in other ways, like what would total revenue be at that level of sales? (i.e. 1250 units x $30 sales price is total revenue at break-even level.)

The question is asking how much rent would be at the break-even level, not what break even is "for rent." Since rent at this level is a set $15,000, how much is rent for (a)? Hint: If you're trying to "figure it out," you've already made it too difficult. (Think more simple.)

As for (b) and (c). Start here: they are giving a base amount. What kind of expense is that? The same kind of expense the $15,000 in (a) was. What kind of expense is the 10% of revenues? If they're also going to charge 10% of revenue, then you need to figure out what that is. Since you're doing break even and you don't know what that number is going to be, you can't use total revenues. You don't need that -- you know what it is per unit.

Everything in this chapter is dependent upon the concepts of contribution margin, variable costs, and fixed costs. So don't ever let those 3 things slip from your mind. They're probably involved somewhere.

Just ponder on that a bit.

[rehmanvohra]

Your approach for (a) is correct. Repeat the same approach for (b) and (c) except that the contribution will be further reduced by 10 or 20% of revenue

After you have worked out the above figures, it should be easy to calculate the net income on sale of 5,000 units under each of the three options

[neversatysfyd]

So this is what I have come up with:

1. SP= 30
VCU=18
CMu= 12
FC = 15000

15000/12= 1250 units to breakeven
Rent is $15000

2. SP= 33
VCU= 19.80
CMu= 13.20
FC= 9000

9000/13.20=682 units to breakeven
rent is $22506

3.
SP= 36
VCU=21.60
CMu=14.40
FC= 4800

4800/14.40=333 units to breakeven
rent is $11,988

I now need direction for the part B of the question:
b. beginning at zero sales show the sales levels at which each option is preferable up to 5000 units

I know that at 0 units it has to be $15,000 but I am unsure of how to answer the above question.

[rehmanvohra]

Why have you added 10% and 20% to revenue and costs? Revenue will not change. The variable costs will change
2. SP= 30
VCU= 18 + 3 = 21
CMu= 9
FC= 9000

9000/9 = 1000 units to break even
rent is $12000: 9000 + (1000 x 3)

3.
SP= 30
VCU=18 + 6 =24
CMu=6
FC= 4800

4800/6=800 units to break even
rent is $9600L: 4800 + (800 x 6)

For part (b) calculate the net income for Zero, 800, 1000 and 5000 unit sales for each of the three options

At zero sales level, the firm will incur losses of 15,000, 9,600 and 4,800 respectively

At 800 sales level will also incur losses for options 1 and 2 and break even for option 3

At 1000 sales level option 1 will incur a loss, option 2 breaks even, option 3 will have s profit of 1,000

At 5000 sales level:
1. 5000 x 12 - 15,000 = Income of $45,000
2. 5000 x 9 - 9,000 = Income $36,000
3. 5000 x 6 - 4,800 = Income $25,200

Decision Option 1 is preferable at 5000 units

[ArcSine]

Neversatysfyd, here's a hint to help you keep going. Question (b) asks you to determine which lease option is optimal, over the interval 0 units to 5,000 units.

The hint is that there are two 'changeover' points within this interval (and I'll give you the first one--it's 1,400 units).

Answering Question (b) will thus come down to identifying the three subintervals...

0 to 1,400;
1,400 to ?; and
? To 5,000...

And for each of these three ranges, showing which lease arrangement is the preferred.

Let us know how you're making out, and best of luck!