Question

Mr. Buster wants to open a new vacuum store called the Pick-up in a nearby plaza. Mr. Buster will be selling vacuums for $140 each. Variable costs (not including the leasing costs below) are $50 for every vacuum.

In terms of lease payments, the plaza has provided him three options:

i. Pay $22 per vacuum sold
ii. $24,000 per month
iii. $16,000 per month and $15 per vacuum sold

Do not enter dollar signs or commas in the input boxes.
Use the negative sign for negative values.
Round all answers to the nearest whole number.

a) Calculate the monthly operating income for each of the three options if 240 units are sold and if 610 units are sold.

Lease Option	Operating Income Based on the Number of Vacuums Sold
	240 units	610 units
i. Pay $22 per vacuum sold	$Answer	$Answer
ii. $24,000 per month	$Answer	$Answer
iii. $16,000 per month and $15 per vacuum sold	$Answer	$Answer

b) At a production level of 610 units, which option should be recommended?
Option: Answeriiiiii

c) Calculate the degree of operating leverage for the second lease option if Mr. Buster sells 610 vacuums.
Round your answer to 2 decimal places.

Degree of Operating Leverage: Answer

Mr. Buster wants to open a new vacuum store called the Pick-up in a nearby plaza. Mr. Buster will be selling vacuums for $140 each. Variable costs (not including the leasing costs below) are $50 for every vacuum.

In terms of lease payments, the plaza has provided him three options:

i. Pay $22 per vacuum sold
ii. $24,000 per month
iii. $16,000 per month and $15 per vacuum sold

Do not enter dollar signs or commas in the input boxes.
Use the negative sign for negative values.
Round all answers to the nearest whole number.

a) Calculate the monthly operating income for each of the three options if 240 units are sold and if 610 units are sold.

Lease Option	Operating Income Based on the Number of Vacuums Sold
	240 units	610 units
i. Pay $22 per vacuum sold	$Answer	$Answer
ii. $24,000 per month	$Answer	$Answer
iii. $16,000 per month and $15 per vacuum sold	$Answer	$Answer

b) At a production level of 610 units, which option should be recommended?
Option: Answeriiiiii

c) Calculate the degree of operating leverage for the second lease option if Mr. Buster sells 610 vacuums.
Round your answer to 2 decimal places.

Degree of Operating Leverage: Answer

Answer 1

a)

	240 Units	610 Units
(i) Pay $22 per Vacum Sold
Sales	$         33,600	$         85,400
Variable Costs	$         17,280	$         43,920
Contribution Margin	$         16,320	$         41,480
Fixed Costs	$                 -	$                 -
Net Operating Income	$        16,320	$        41,480
(ii) Pay $24000 per month
Sales	$         33,600	$         85,400
Variable Costs	$         12,000	$         30,500
Contribution Margin	$         21,600	$         54,900
Fixed Costs	$         24,000	$         24,000
Net Operating Income	$         (2,400)	$        30,900
(i) Pay $16000 per month & $15 per Vacum
Sales	$         33,600	$         85,400
Variable Costs	$         15,600	$         39,650
Contribution Margin	$         18,000	$         45,750
Fixed Costs	$         16,000	$         16,000
Net Operating Income	$           2,000	$        29,750

b)
Option (i) should be recommended.

c)
Degree of Operating Leverage = Contribution Margin / Net Operating Income
= $54900 / 30900 = 1.78