Chris Rugs is holding a 2-week carpet sale at Jeans Club, a local warehouse store. Chris Rugs plans to sell carpets for $500 each. The company will purchase the carpets from a local distributor for $350 each, with the privilege of returning any unsold units for a full refund. Jeans Club has offered Chris Rugs two payment alternatives for the use of space. Option 1: A fixed payment of $5100 for the sale period

Option 2: 10% of total revenues earned during the sale period Assume Chris Rugs will incur no other costs.

Requirements

1. Calculate the breakeven point in units for (a) option 1 and (b) option 2.

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

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

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

3. Calculate the degree of operating leverage at sales of 102 units for the two rental options.

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