Question: Factory plans to open a new retail store in Mahtomedi

Factory plans to open a new retail store in Mahtomedi, Minnesota. The store will sell specialty candles for an average of $ 45 each. The average variable costs per candle are as follows:
• Wax $ 10
• Other additives $ 4
• Base $ 2
The company is negotiating its lease for the new location. The landlord has offered two leasing options:
Option A) a lease of $ 3,600 per month; or
Option B) a monthly lease cost of $ 990 plus 20% of the company’s monthly sales revenue.
The company expects to sell approximately 190 candles per month.

1. Which lease option is more attractive for the company under its current sales ­expectations? Calculate the total lease cost under:
a. Option A
b. Option B
2. At what level of sales (in units) would the company be indifferent between the two lease options? Show your proof.
3. If the company’s expected sales were 490 candles instead of the projection listed in the exercise, which lease option would be more favorable for the company? Why?

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  • CreatedAugust 27, 2014
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