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Unformatted text preview: 340 Alternative cost structures, uncertainty, and sensitivity analysis.1.Contribution margin assuming fixed rental arrangement = $50 – $30 = $20 per bouquetFixed costs = $5,000Breakeven point = $5,000 ÷ $20 per bouquet = 250 bouquetsContribution margin assuming $10 per arrangement rental agreement = $50 – $30 – $10 = $10 per bouquetFixed costs = $0Breakeven point = $0 ÷ $10 per bouquet = 0 (i.e. EB makes a profit no matter how few bouquets it sells)2.Let xdenote the number of bouquets EB must sell for it to be indifferent between the fixed rent and royalty agreement.To calculate xwe solve the following equation.$50x– $30x– $5,000 = $50x– $40x$20x– $5,000 = $10x$10x= $5,000x= $5,000 ÷ $10 = 500 bouquetsFor sales between 0 to 500 bouquets, EB prefers the royalty agreement because in this range, $10x> $20x– $5,000. For sales greater than 500 bouquets, EB prefers the fixed rent agreement because in this range, $20x– $5,000 > $10x. 3. If we assume the $5 savings in variable costs applies to both options, we solve the following equation forx. $50x– $25x– $5,000 = $50x– $35x$25x– $5,000 = $15x$10x= $5,000x= $5,000 ÷ $10 per bouquet = 500 bouquetsThe 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, $15x> $25x– $5,000. For sales greater than 500 bouquets, EB prefers the fixed rent agreement because in this range, $25x– $5,000 > $15x.4. Fixed rent agreement:Bouquets Sold(1)Revenue(2)Fixed Costs(3)Variable Costs(4)OperatingIncome(Loss)(5)=(2)–(3)–(4)Probability(6)Expected Operating Income(7)=(5)×(6)200200×$50=$10,000$5,000200×$30=$ 6,000$ (1,000)0.20$ ( 200)400400×$50=$20,000$5,000400×$30=$12,000$ 3,0000.20600600600×$50=$30,000$5,000600×$30=$18,000$ 7,0000.201,400800800×$50=$40,000$5,000800×$30=$24,000$11,0000.202,2001,0001,000×$50=$50,000$5,0001,000×$30=$30,000...
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This note was uploaded on 05/27/2011 for the course ACG 3361 taught by Professor Swirsky during the Spring '11 term at Florida A&M.
 Spring '11
 Swirsky
 Cost Accounting

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