Problem 1

SG operates a booth at a local mall, selling watches. Current monthly sales revenue is $24,000 with total variable costs (wholesale cost of watches) of $9,000. SG currently pays $2,000 a month to rent the space and pays two full-time employees to each work 160 hours a month at $15 per hour. The manager is paid a monthly salary of $4,000.

Required (Show your work):

1. Calculate how much sales revenue SG needs to break even (10 points)
2. If SG wants to earn an operating income of $6,300 per month, then how much sales revenue does it need to generate? (5 points)
3. Calculate operating income if SG achieves sales revenue of $30,000. (5 points)
4. Assume SG can choose to pay rent at a rate of 10 percent of revenue. Note that this option would lower the CM ratio by 0.10 and lower fixed costs by $2,000 per month. SG can choose to pay rent either 1) as 10% of its revenue, or 2) as a monthly payment of $2,000. At what sales levels would SG prefer to pay a fixed amount of monthly rent (i.e., $2,000 per month), and at what sales levels would SG prefer to pay 10% of its monthly revenue as rent? (5 points)