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Zoe’s Fresh Flowers is new business ready to open a store in the Westfield shopping...

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Accounting

Zoe’s Fresh Flowers is new business ready to open a store in the Westfield shopping centre nearby. Westfield has a number of florist shops already, so Zoe is anxious about the demand for her flower arrangements. Westfield has two options available for rental contracts: a) A standard fixed rent agreement of $10,000 per month; or b) A commission contract based on 20% of sales revenue with $4,000 per month minimum rent. Zoe estimates that a bouquet will sell for $120 and have a variable cost of $69 to make and a 10% sales commission for the shop attendant. 


Required: 


1. What is the break-even point in units under each rental agreement? [5 marks] 


2. Zoe is uncertain if she will sell 200, 400, 600, 800 or 1000 arrangements per month. Prepare a table that shows the expected profit at each sales level under each rental agreement. 


For what range of sales levels will Zoe prefer: 


(a) the fixed rent agreement or (b) the royalty agreement? [10 marks] 


3. If Zoe signs a sales agreement with a local street vendor rather than Westfield, it will save her both rental contract options and sales commission. 


However, she could only sell the flower arrangements for $80 to the vendor. Explain how would this affect your answer in requirements 2?

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