Gyrdir ehf. manufactures and sells one type of leather belts for 2,500 kr. piece. Production for...

Gyrdir ehf. manufactures and sells one type of leather belts for 2,500 kr. piece. Production for each belt, all variable, amounts to 1,000 kr. Gyrdir is planning to rent a booth on the forthcoming fashion show in the Exhibition Hall. Gyrdir ehf. can choose between the following rental terms for the sales booth:

1. to pay only a fixed rent before the show, kr. 501,000.

2. to pay a fixed amount of kr. 400,000 and an additional 10% of sales revenue.

3. to pay 20% of the sales revenue but no fixed amount.

Requested:

a) What does Gyrdir ehf. have to sell many multiple belts to reach a break-even point, based on

which of these three options?

b) What choice should Gyrdir ehf. choose if he expects to sell 800 belts at the show? Show

calculations to justify the choice.

Expert Solution

	Option 1	Optin 2	Option 3
Selling price per unit	2,500	2,500	2,500
Variable Production Cost per unit	1,000	1,000	1,000
Additional Variable cost per unit	-	250	500
Contribution Margin per unit	1,500	1,250	1,000
Total Fixed costs	501,000	400,000	-
Break even point = Total Fixed costs/Contribution Margin per unit	334	320	-	Belts

b)Choose Option C
Profit = Contribution Margin - Fixed costs	699,000	600,000	800,000

ekkarill92 answered 10 months ago

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