Ch3 second assign sol

# Ch3 second assign sol - 3-40 Alternative cost structures...

This preview shows pages 1–2. Sign up to view the full content.

3-40 Alternative cost structures, uncertainty, and sensitivity analysis. 1. Contribution margin assuming fixed rental arrangement = \$50 – \$30 = \$20 per bouquet Fixed costs = \$5,000 Breakeven point = \$5,000 ÷ \$20 per bouquet = 250 bouquets Contribution margin assuming \$10 per arrangement rental agreement = \$50 – \$30 – \$10 = \$10 per bouquet Fixed costs = \$0 Breakeven point = \$0 ÷ \$10 per bouquet = 0 (i.e. EB makes a profit no matter how few bouquets it sells) 2. Let x denote the number of bouquets EB must sell for it to be indifferent between the fixed rent and royalty agreement. To calculate x we solve the following equation. \$50 x – \$30 x – \$5,000 = \$50 x – \$40 x \$20 x – \$5,000 = \$10 x \$10 x = \$5,000 x = \$5,000 ÷ \$10 = 500 bouquets For sales between 0 to 500 bouquets, EB prefers the royalty agreement because in this range, \$10 x > \$20 x – \$5,000. For sales greater than 500 bouquets, EB prefers the fixed rent agreement because in this range, \$20 x – \$5,000 > \$10 x . 3. If we assume the \$5 savings in variable costs applies to both options, we solve the following equation for x . \$50 x – \$25 x – \$5,000 = \$50 x – \$35 x \$25 x – \$5,000 = \$15 x \$10 x = \$5,000 x = \$5,000 ÷ \$10 per bouquet = 500 bouquets The answer is the same as in Requirement 2, that is, for sales between 0 to 500 bouquets, EB prefers the royalty agreement because in this range, \$15 x > \$25 x – \$5,000. For sales greater than 500 bouquets, EB prefers the fixed rent agreement because in this range, \$25 x – \$5,000 > \$15 x . 4. Fixed rent agreement: Bouquets Sold (1) Revenue (2) Fixed Costs (3) Variable Costs (4) Operating Income (Loss) (5)=(2)–(3)–(4) Probability (6) Expected Operating Income (7)=(5) × (6) 200 200 × \$50=\$10,000 \$5,000 200 × \$30=\$ 6,000 \$ (1,000) 0.20 \$ ( 200) 400 400 × \$50=\$20,000 \$5,000 400 × \$30=\$12,000 \$ 3,000 0.20 600 600 600 × \$50=\$30,000 \$5,000 600 × \$30=\$18,000 \$ 7,000 0.20 1,400 800 800 × \$50=\$40,000 \$5,000 800 × \$30=\$24,000 \$11,000 0.20 2,200 1,000 1,000 × \$50=\$50,000 \$5,000 1,000 × \$30=\$30,000

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern