The Candle Factory plans to open a new retail store in Sanford, Maine. The store will sell specialty candles for an average of $25 each. The average variable costs per candle are as follows: • Wax $7 • Other additives $2 • Base $3 The company is negotiating its lease for the new location. The landlord has offered two leasing options: Option A) a lease of $3,500 per month; or Option B) a monthly lease cost of $1,000 plus 20% of the company's monthly sales revenue. The company expects to sell approximately 400 candles per month. 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 700 candles instead of the projection listed in the exercise, which lease options would be more favorable for the company? Why?
The Candle Factory plans to open a new retail store in Sanford, Maine. The store will sell specialty candles for an average of $25 each. The average variable costs per candle are as follows: • Wax $7 • Other additives $2 • Base $3 The company is negotiating its lease for the new location. The landlord has offered two leasing options: Option A) a lease of $3,500 per month; or Option B) a monthly lease cost of $1,000 plus 20% of the company's monthly sales revenue. The company expects to sell approximately 400 candles per month. 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 700 candles instead of the projection listed in the exercise, which lease options would be more favorable for the company? Why?
Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Chapter15: Decision Analysis
Section: Chapter Questions
Problem 3P: Amy Lloyd is interested in leasing a new Honda and has contacted three automobile dealers for...
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Question
The Candle Factory plans to open a new retail store in Sanford, Maine. The store will sell specialty candles for an average of $25 each. The average variable costs per candle are as follows:
|
•
|
Wax $7
|
|
•
|
Other additives $2
|
|
•
|
Base $3
|
The company is negotiating its lease for the new location. The landlord has offered two leasing options:
|
|
Option A) a lease of
$3,500
per month; or |
|
|
Option B) a monthly lease cost of
$1,000
plus
20%
of the company's monthly sales revenue. |
The company expects to sell approximately 400 candles per month.
|
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
700
candles instead of the projection listed in the exercise, which lease options would be more favorable for the company? Why? |
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