E7-36A (similar to) Question Help Wax Art plans to open a new retail store in Br
ID: 2539349 • Letter: E
Question
E7-36A (similar to) Question Help Wax Art plans to open a new retail store in Brewer, Maine. The store will sell specialty candles for an average of The company is negotiating its lease for the new location. The landlord has offered two leasing options: Option A) $10 each. The average variable costs per candle are as follows a lease of $2 500 per month, or Option B) a monthly lease cost of $2,000 plus 10% of the company's monthly Wax $4 Other additives $2 Base $1 sales revenue. The company expects to sell approximately 300 candles per montih 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 Requirements Total lease costs 1. Which lease option is more attractive for the company under its current sales expectations? Calculate the total lease cost under Option A Option B At what level of sales (in units) would the company be indifferent between the two lease options? Show your proof 2. 3. If the company's expected sales were 650 candles instead of the projection listed in the exercise, which lease options would be more favorable for the company? Why? Choose from any drop-down list and then click Check Answer. parts remaining Print Done Clear A erExplanation / Answer
1. Calculation of Lease costs for the month under both the options :
Option A) : The lease cost is 2,500 per month.
Option B) : 2,000 per month + 10% of sales revenue
Total expected sales = 300 candles x $10 per candles = $3,000
Lease rent as 10% of sales (3,000x10/100) = $300
Fixed portion = $2,000
Total = $2,300
Conclusion : Option B is preferrable as the lease cost is lesser than option A.
2. To be indifferent, the cost of lease should have been 2,500 under option B as well. For that, the sales has to be increased as the variable portion of the lease is calculated as the percentage of sales.
Current cost of lease under option B (as calculated in 1) = 2,300
additional cost to be increased to be indifference( 2,500-2,300) = 200
lease cost is 10% of the sales, therefore additional sales required for additional lease cost is = 200/10*100 = $2,000.
hence, total sales to be indifferenct would be = current sales + additional sales required = 3,000+2,000 = $5,000.
Proof : Variable portion of lease on total sales = 5,000*10% = 500
Add : fixed portion of 2,000 = 2,000
Total = 2,500
3. if the current projection would be 650 candles :
Option A) : There will be no change as it is not based on sales = $2,500
Option B) : Total sales revenue (650x10) = 6,500
Variable portion of lease (10% of 6,500) = 650
Fixed portion of 2,000 = 2,000
Total lease cost (2,000+650) = 2,650
Conclusion : Cost under option A is 2500 and option B is 2650. thus option A would be preferrable at this projection.
Solution ends here.
Please ask if any doubt.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.