Nevada Flower Creations operates retail stores in shopping malls. The average selling price of an arrangement is
Question:
Nevada Flower Creations operates retail stores in shopping malls. The average selling price of an arrangement is $25. The average cost of each sale is $15. A new mall is opening where Nevada Flower Creations wants to locate a store, but the location manager is not sure about the rent method to accept. The mall operators offer three options for its retail store rentals as follows:
1. Paying a fixed rent of $12,500 a month,
2. Paying a base rent of $10,000 plus 8% of revenue received, or
3. Paying a base rent of $5,000 plus 20% of revenue received up to a maximum rent of $20,000. Required:
a. Compute the break-even sales of each option and the monthly rent paid at break-even.
b. At what sales level is the manager indifferent between Options 2 and 3?
c. Beginning at zero sales, show the sales levels at which each option is preferable up to 5.000 units.