ASSIGNMENT MATERAL O 85 1. For the two possible sales mouet in requirements 1 and 21. determine operating income if total unit sales are 750.000 LO 3,4 3-29 Alternative cont structures, uncertainty, and sensitivity analysis. Edible Bouquets (EB) makes and els flower bouquets EB is considering opening a new store in the local mall. The mall has several empty shops und EB is more of the demand for its product. The mail has offered EB two alternative rental agree ment. The first is a standard fixed-runt agreement where EB will pay the mall $5,000 per month. The second royally agreement where the mall receives $10 for each bouquet cold. EB estimates that abouquet wil fort and have a variable cost of $30 to make including the cost of the flowers and commission for the alesperson 1 What is the breakeven point in units under each assumption 2. For what range of sales levels will EB prefer tal the fixed-rent agreement and (b) the royalty agree ment 1 EB signs a sales agreement with a local flower stand, it will save $ in variable costs per bouquet How would the affect your answer in requirement 2? 4 EB estimates that the store is equally likely to sell 200, 400, 600, 800, or 1,000 arrangements. Using infor mation from the original problem, prepare a table that shows the expected profit at each sales level under wach rental agreement. What is the expected value of each rental agreement? Which rental agreement should EB choose? 3-30 CVP analysis, multiple cost drivers. Clarke Ltd. is a manufacturer of promotional items. The majority of its revenues is from the production of promotional pens. Clarke imports these pens from China and then imprunts them with corporate names. These pans are then distributed to customers, suppliers, etc., for pro- motional purposes. The pens are purchased in batches of 100 and each batch costs Clarke $95. Imprinting costs $0.35 per pen Fixed costs average $275.000 per year. In addition to the variable imprint costs per per Clarke incurs additional variable costs per customer regardless of how many pens they may order. The van able cost per customer is $120. The selling price is $4.50 per pen. Clarke requires a minimum order of 50 pens and typically sells to customers in batches of 50, 100, 250, or 500 units 1. Assuming that Clarke anticipates it will sell 350,000 pens during the year and that the average order site will be 100 pens, calculate Clarke's operating income and operating margin 2 Calculate Clarke's operating income and operating margin assuming it will sell 350,000 pens, but that the average order site will be 250 pens Calculate the breakeven points in terms of number of orders, assuming the various batch sizes of 50, 100, 250 and 500 units LO4 3 3-31 Uncertainty. Angela King is the Las Vegas promoter for professional lighter Randy Couture, King's promoting a new Octagon world championship fight for Couture. The key area of uncertainty is the size of the cable pay-per-view TV market. King will pay Couture a fixed fee of $3.2 million and 25% of net cable pay per view revenue. Every cable TV home receiving the event pays $45, of which King receives $27. King pays Couture $6.75,25% of the $27 King estimates the following probability distribution for homes purchasing the pay-per-view event Probability 0.10 0.10 0.20 Demand 250.000 300.000 350,000 400.000 500,000 1,000,000 040 0.10 0.10 Required 1. What is the expected value of the payment King will make to Couture? 2. Assume the only uncertainty is over cable TV demand for the fight. King wants to know the breakeven point given her own fixed costs of $1.3 million and her own variable costs of $2.25 per home. Also include King's payments to Couture in your answer.)