Operating leverage. Charles Rothman is an importer of silver cuff bracelets from Mexico. He has a three-month

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Operating leverage. Charles Rothman is an importer of silver cuff bracelets from Mexico.

He has a three-month agreement with the local coffee shop, Dellano’s, to set up a booth to exhibit the jewellery. Rothman is under no obligation to keep any unsold items and can return them to the Mexican silversmith at no personal cost. The average selling price of the bracelets is $125 and it costs Rothman $80 to purchase each piece. Dellano’s has proposed two payment alternatives for the use of space.

® Option I: A fixed payment of $435 per month.

® Option 2: 12% of the total revenues earned during the agreement.

REQUIRED 1. Calculate the breakeven point in units for

(a) option | and

(b) option 2.

2. At what level of sales revenue will Rothman earn the same operating income under either option?

a. For what range of unit sales will Rothman prefer option 1?

b. For what range of unit sales will Rothman prefer option 2?

4. Calculate the degree of operating leverage at sales of 150 units for the two alternative rental options.

5. Briefly explain and interpret your answer in requirement 4.

LO1

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