Operating leverage. Cover Rugs is holding a 2-week carpet sale at Josh’s Club, a local warehouse store. Cover Rugs plans to sell carpets for $950 each. The company will purchase the carpets from a local distributor for $760 each, with the privilege of returning any unsold units for a full refund. Josh’s Club has offered Cover Rugs two payment alternatives for the use of space. Option 1: A fixed payment of $7,410 for the sale period Option 2: 10% of total revenues earned during the sale period Required: Assume Cover Rugs will incur no other costs. Calculate the breakeven point in units for (a) Option 1 and (b) Option 2. At what level of revenues will Cover Rugs earn the same operating income under either option? For what range of unit sales will Cover Rugs prefer Option 1? For what range of unit sales will Cover Rugs prefer Option 2? Calculate the degree of operating leverage at sales of 65 units for the two rental options. Briefly explain and interpret your answer to requirement 3.

Operating leverage. Cover Rugs is holding a 2-week carpet sale at Josh’s Club, a local warehouse store. Cover Rugs plans to sell carpets for $950 each. The company will purchase the carpets from a local distributor for $760 each, with the privilege of returning any unsold units for a full refund. Josh’s Club has offered Cover Rugs two payment alternatives for the use of space. Option 1: A fixed payment of $7,410 for the sale period Option 2: 10% of total revenues earned during the sale period Required: Assume Cover Rugs will incur no other costs. Calculate the breakeven point in units for (a) Option 1 and (b) Option 2. At what level of revenues will Cover Rugs earn the same operating income under either option? For what range of unit sales will Cover Rugs prefer Option 1? For what range of unit sales will Cover Rugs prefer Option 2? Calculate the degree of operating leverage at sales of 65 units for the two rental options. Briefly explain and interpret your answer to requirement 3.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter2: Building Blocks Of Managerial Accounting

Section: Chapter Questions

Problem 12EB: Able Transport operates a tour bus that they lease with terms that involve a fixed fee each month...

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