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Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling price of an arrangement is $28 and the average cost of
Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling price of an arrangement is $28 and the average cost of each sale is $18. A new mall is opening where Karen wants to locate a store, but the location manager is not sure about the rent method to accept. The mall operator offers the following three options for its retail store rentals: 1. paying a fixed rent of $15,000 a month, or 2. paying a base rent of $9,000 plus 10% of revenue received, or 3. paying a base rent of $4,800 plus 20% of revenue received up to a maximum rent of $25,000. Required: a. For each of the three options compute the breakeven sales (dollars and units) and the monthly rent at break-even. b. Calculate the contribution margin per unit for each of the three options. c. At what level of revenues will Karen earn the same operating income under either option 1 or option 2? d. Calculate the degree of operating leverage at sales of 1,500 units for each of the three rental options. c. Which option should Karen choose, assuming sales are expected to be 5000 unitsk? Explain your answer in detail
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