Samuel Linkletter is an importer of clay gardening pots. He has a six-month agreement with a local gardening store, West City Gardening, to set up a display to sell his product. Samuel can return any unsold items at no cost. The average selling price for the pots is $18 and on average, they cost Samuel $7 each. The owner of West City Gardening has proposed two options:
1. A fixed payment of $375 per month
2. A fixed payment of $125 per month; and, 20% of sales revenues earned during the term of the agreement
Required:
a. Calculate the degree of operating leverage for both options at sales of 540 units
b. Explain the results from part a. in terms of risk
c. What number of units must be sold to generate the same operating income for both options? Which option is favourable below this point, and which option is favourable above this point?

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The Answer of Samuel Linkletter is an importer of clay gardening pots. He has a six-month agreement with a local gardening store, West City Gardening, to set up a display to sell his product. Samuel can return any unsold items at no cost. The average selling price for the pots is $18 and on average, they cost Samuel $7 each. The owner of West City Gardening has proposed two options:
1. A fixed payment of $375 per month
2. A fixed payment of $125 per month; and, 20% of sales revenues earned during the term of the agreement
Required:
a. Calculate the degree of operating leverage for both options at sales of 540 units
b. Explain the results from part a. in terms of risk
c. What number of units must be sold to generate the same operating income for both options? Which option is favourable below this point, and which option is favourable above this point?

Samuel Linkletter Is an Importer of Clay Gardening Pots