Curt Rugs is holding a two- week carpet sale at Josh’s Club, a local warehouse store. Curt Rugs plans to sell carpets for $ 850 each. The company will purchase the carpets from a local distributor for $ 340 each, with the privilege of returning any unsold units for a full refund. Josh’s Club has offered Curt Rugs two payment alternatives for the use of space.

¦ Option 1: A fixed payment of $ 18,870 for the sale period

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

Assume Curt Rugs will incur no other costs.

Required

1. Calculate the breakeven point in units for

(a) Option 1 and

(b) Option 2.

2. At what level of revenues will Curt Rugs earn the same operating income under either option?

a. For what range of unit sales will Curt Rugs prefer Option 1?

b. For what range of unit sales will Curt Rugs prefer Option 2?

3. Calculate the degree of operating leverage at sales of 185 units for the two rental options.

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