You are the advisor of a Junior Achievement group in a local high school. You need to help the group make a decision about fees that must be paid to sell gardening tools at the Home and Garden Show. The group sells a set of tools for $20. The manufacturing cost (all variable) is $6 per set. The Home and Garden Show coordinator allows the following three payment options for groups exhibiting and selling at the show:
1. Pay a fixed booth fee of $5,600.
2. Pay a fee of $3,800 plus 10% of all revenue from tool sets sold at the show.
3. Pay 15% of all revenue from tool sets sold at the show.
A. Compute the breakeven number of tool sets for each option.
B. Which payment plan has the highest degree of operating leverage?
C. Which payment plan has the lowest risk of loss for the organization? Explain.
D. At what level of revenue should the group be indifferent to options 1 and 2?
E. Which option should Junior Achievement choose, assuming sales are expected to be 1,000 sets of tools? Explain.