Carmel Rugs is holding a 2-week carpet sale at Jean’s Club, a local warehouse store. Carmel Rugs plans to sell carpets for $ 1,000 each. The company will purchase the carpets from a local distributor for $ 400 each, with the privilege of returning any unsold units for a full refund. Jean’s Club has offered Carmel Rugs two payment alternatives for the use of space.

Option 1: A fixed payment of $ 17,400 for the sale period

Option 2: 20% of total revenues earned during the sale period

Assume Carmel Rugs will incur no other costs.

Required

1. Calculate the breakeven point in units for

(a) Option 1

(b) Option 2.

2. At what level of revenues will Carmel Rugs earn the same operating income under either option? a. For what range of unit sales will Carmel Rugs prefer option 1? b. For what range of unit sales will Carmel Rugs prefer option 2?

3. Calculate the degree of operating leverage at sales of 87 units for the two rental options.

4. Briefly explain and interpret your answer to requirement 3.