Question

10. The Candle Factory plans to open a new retail store in Saco, Maine. The store will sell specialty candles for an average of $10 each. The average variable costs per candle are as follows: • Wax $4 Other additives $2 • Base $1 The company is negotiating its lease for the new location. The landlord has offered two leasing options: Option A) a lease of $2,500 per month; or Option B) a monthly lease cost of $2.000 plus 10% of the company's monthly sales revenue The company expects to sell approximately 450 candles per month Read the requirements Requirement 1. Which lease option is more attractive for the company under its current sales expectations? Calculate the total lease cost under Option A and Option B. Begin by identifying the formula to calculate the total costs. (2) - Total lease costs (Consider only the fixed and variable costs related to the lease options.) The total lease cost under Option A is $ . (Consider only the fixed and variable costs related to the lease options.) The total lease cost under Option B is $ Which lease option is more attractive for the company under its current sales expectations? The lease option that is more attractive for the company under its current sales expectations is (3) - because it Requirement 2. At what level of sales (in units) would the company be indifferent between the two lease options? Show your proof. Begin by selecting the equation to determine the indifference point. (Abbreviations used" FC - Fixed costs, VCU - Variable costs per unit) (5) The indifference point is candles Show your proof (Consider only the fixed and variable costs related to the lease options. Complete all input cells Enter a "0" for zero balances) Option A Option B (6) Total lease costs Requirement 3. If the company's expected sales were 800 candles instead of the projection listed in the exercise, which lease options would be more favorable for the company? Why? The lease option that is more attractive for the company if the company plans to sell 800 candles a month is (6) because the (9) 1: Requirements

Answer 1

1 - total fixed expense

2 - total variable expense

Least cost under option A - 2500

Least cost under option B - 2000 + 450*10%*10 = 2000 + 450 = 2450

3 - Option B , fixed plus sales commission

4 - it results in lower total least cost

5 - VC U (option A) * FC option A = Vc u (option B) * FC option B

Indifference point is 500 Candles

Option A= 2500 + 0 = 2500

OPtion B = 2000 + 500*10*10% = 2500

6 - total fixed expense

7 - total variable expense

8 - option A, the fixed lease payment

9 - sales volume is more than the indifference point