The Varsity Club sells souvenir items at university sporting events for $24 each. The souvenir items cost $16 each. The club is negotiating with the university administration to sell the items in a kiosk in the university student center. Three rental arrangements are under consideration:Option 1: Pay rent of $2,000Option 2: Pay rent of $1,200 plus 10% of revenueOption 3: Pay the university 25% of revenueThe club estimates that it will be able to sell 300 souvenir items during the period.Required:1) Compute the break-even point in units for each of the three options.2) Assuming the club reaches its sales target, which option should be chosen?
What will be an ideal response?
1) Break-even points:
Option 1: ($24X ? $16X) ? $2,000 = $0
$8X = $2,000
X = 250 units
Option 2: $24X ? $16X ? (10% × $24X) ? $1,200 = $0
$5.60X ? $1,200 = $0
$5.60X = $1,200
X = 214.29 units = 215 units
Option 3: Because there are no fixed costs, the Varsity Club will earn a profit at any volume greater than zero.
2) Option 1 profit: ($8 × 300) ? $2,000 = $400
Option 2 profit: ($5.60 × 300) ? $1,200 = $480
Option 3 profit: 300 × ($24 ? $16 ? $6) = $600
Therefore, option 3 is the best choice.
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