Ch3 second assign sol

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

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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
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