Question

Exceptional

Bouquets​ (EB) makes and sells flower bouquets. EB is considering opening a new store in the local mall. The mall has several empty shops and EB is unsure of the demand for its product. The mall has offered EB two alternative rental agreements. The first is a standard​ fixed-rent agreement where EB will pay the mall

$5,700

per month. The second is a royalty agreement where the mall receives

$12

for each bouquet sold. EB estimates that a bouquet will sell for

$51

and have a variable cost of

$32

to make​ (including the cost of flowers and commission for the​ salesperson).Requirements

Requirements

1.	What is the breakeven point in units under each​ assumption?
2.	For what range of sales levels will EB prefer​ (a) the​ fixed-rent agreement and​ (b) the royalty​ agreement?
3.	If EB signs a sales agreement with a local flower​ stand, it will save $7 in variable costs per bouquet. How would this affect your answer in requirement​ 2?
4.	EB estimates that the store is equally likely to sell 260​, 460​, 660​, 860​, or 1,060 arrangements. Using information from the original​ problem, prepare a table that shows the expected profit at each sales level under each rental agreement. What is the expected value of each rental​ agreement? Which rental agreement should EB​ choose?

Answer 1