Question

Tie Lupiake VUIU PAULUIY Pianis LU Upell diewielell SIUIC lll Sall Jose, Call Ulla. Tie Sluie will sell specially Cupcakes IUI Opel Cupcake (edil Cupcake las variable cost of $3.) The company is negotiating its lease for the new store. The landlord has offered two leasing options: 1) a lease of $5,500 per month; or 2) a monthly lease cost of $2,500 plus 6% of the company's monthly sales revenue. Requirements 1. If the Cupcake World Factory plans to sell 9,000 cupcakes a month, which lease option would cost less each month? Why? 2. If the company plans to sell 11,500 cupcakes a month, which lease option would be more attractive? Why? Requirement 1. If the Cupcake World Factory plans to sell 9,000 cupcakes a month, which lease option would cost less each month? Why? Begin by calculating the indifference point. Select the equation to determine the indifference point. (Abbreviations used: FC = Fixed costs, VCU = Variable costs pe unit) (VCU (option 1) x Units) + FC (option 1) = (VCU (option 2) x Units) + FC (option 2) The indifference point is 10,000 cupcakes. The lease option that would have the lowest cost each month if Cupcake World plans to sell 9,000 cupcakes a month is because the

Answer 1

The indifference point is where the cost under both alternatives is same

Variable cost per unit*Number of units + fixed cost under option 1 = Variable cost per unit*Number of units + fixed cost under option 2

Hence, indifference point is = (5500-2500)/(5*6%-0)

= 10,000 cupcakes

The lowest cost would be of Option 2 i.e. monthly rental of $2500 plus a 6% of revenue since the actual sales are lower then the break even sales

And hence, option with lower fixed costs will be preferred