The Candle Company plans to open a new retail store in Forest Lake, Minnesota. The Candle Company will sell specialty candles for an average of $20 each. The average variable costs per candle are as follows?
• Wax $6
• Other additives $1
• Base $2
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 $1,200 plus 10% of the company's monthly sales revenue.
The company expects to sell approximately 900 candles per month.
Requirements
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
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 500 candles instead of the projection listed in the exercise, which lease options would be more favorable for the company? Why?