Question $3(20$ marks$)$

Currently, Starbucks coffee is negotiating with UIC to open a new branch. UIC has offered two options to Starifucks as the profit sharing plans to UIC:

Option $1$: $40\%$ of total revenue of the financial year

Option $2$: a constant payment of $$120,000$ of the financial year

At this moment, there are only four full$-$time staff working as either a morning or afternoon shift. Starbucks purchases its coffee bean from overseas; the average purchased price for each cup is $$8.$ Due to the beginning of the new semester, Starbucks intends to attract more students by offering $$15$ each cup for both new students and existing students.

Required:

a$.$ Assuming you are the branch manager of Starbucks coffee in UIC, at what level of revenues will Starbucks earn the same operating income under Option $1$ and Option $2?$ How much is this same operating income?

$(7$ marks$)$

b$.$ Compute operational leverage at the targeted sales of $20,000$ cups under the two options mentioned above.

$(4$ marks$)$

c$.$ Please comment on the different operational leverages resulting from the two options calculated in part $b$ and explain the differences.

$(3$ marks$)$

d$.$ If Starbucks coffee has a target of $25,000$ cups how would this target affect its decisions by considering the above mentioned two options? Explain why.

$(6$ marks$)$

END