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The Candle Company plans to open a new retail store in Portland, 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 400 candles per month. 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 candles.

The Candle Company plans to open a new retail store in Portland, 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 400 candles per month. 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 candles.

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter5: Network Models
Section5.3: Assignment Models
Problem 12P
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The Candle Company plans to open a new retail store in Portland, 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 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 The indifference point is The company expects to sell approximately 400 candles per month. Requirement 2. At what level of sales (in units) would the company be indifferent between the two lease options? Show your proof. candles. 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)
Transcribed Image Text:The Candle Company plans to open a new retail store in Portland, 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 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 The indifference point is The company expects to sell approximately 400 candles per month. Requirement 2. At what level of sales (in units) would the company be indifferent between the two lease options? Show your proof. candles. 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)
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