Question

JUST THE INDIFFERENCE POINT PLEASE!

Candle World plans to open a new retail store in Eastport, Maine. The store will sell specialty candles for an average of $30 each. The average variable costs per candle are as follows: Wax $6 The company is negotiating its lease for the new location. The landlord has offered two leasing options: Option A) a lease of $3,000 per month; or Option B) a monthly lease cost of $1,650 plus 10% of the company's monthly sales revenue. The company expects to sell approximately 400 candles per month. Read the requirements. Other additives $3 Base $3 The total lease cost under Option A is $ 3,000. (Consider only the fixed and variable costs related to the lease options.) The total lease cost under Option B is $ 2,850 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 option B, the fixed lease payment plus sales based commission because it results in the lowest total lease costs. 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) (VCU (option A) x Units) + FC (option A) = (VCU (option B) x Units) + FC (option B) The indifference point is dles.

Answer 1

Let number of units be 'n' Option A Variable cost per unit ($6 + $3 + $3) Fixed Cost (lease cost) $ $ 12 3,000 $ Option B Variable cost per unit ($6 + $3 +$3) Comission on sales @ 10% of $30 Total Variable Cost Fixed cost (lease cost) $ 12 3 15 1,650 Indifference Point (VCU option A x Units) + Fixed costs A = (VCU option B x Units) + Fixed costs B $12 x n + $3000 $15 x n + $1650 $15n - $12n $3000 - $1650 $3 n $ 1,350 $1350 / $3 Number of Units 450 Therefore, Indifference Point will be 450 units

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