Bouquets (EB) makes and sells flower bouquets. EB is considering opening a new store in the local mall. The mall has several empty shops and EB is unsure of the demand for its product. The mall has offered EB two alternative rental agreements. The first is a standard fixed-rent agreement where EB will pay the mall $5,300 per month. The second is a royalty agreement where the mall receives $10 for each bouquet sold. EB estimates that a bouquet will sell for $52 and have a variable cost of $27 to make (including the cost of flowers and commission for the salesperson).Requirements

Requirement 1

Determine the formula used to calculate the breakeven units.

Number of units to breakeven

=

Fixed cost Contribution margin per unit

Calculate the breakeven point in units for: (For entries with a $0 balance, make sure to enter "0" in the appropriate field.)

	Units
Standard fixed rent agreement	212
Royalty agreement	0

Requirement 2

In order to determine the range of sales levels EB would prefer for each agreement, we must first calculate the indifference point. Determine the formula to calculate the indifference point for EB.

Fixed rent agreement					=	Royalty agreement
Sales	-	Total variable costs	-	Fixed cost	=	Sales	-	Total variable costs	-	Fixed cost

Now calculate the indifference point.

The indifference point is at 530530 units. EB would prefer the fixed rent agreement at sales more than the indifference point. The royalty agreement would be preferred at 0 units up to the indifference point.

Requirement 3

Next assume that EB signs a sales agreement with a local flower stand and saves $8 in variable costs per bouquet. Calculate the new indifference point. The indifference point is at

nothing units.

Answer rating: 100% (QA)

Working notes Standard fixed Royalty agreement agreement 52 Selling price Less ... View the full answer