Question

The Yummy Delights Factory plans to open a new retail store in Casper, Wyoming. The store will sell specialty cupcakes for $4 per cupcake (each cupcake has a variable cost of $2.) The company is negotiating its lease for the new store. The landlord has offered two leasing options: 1) a lease of $3,000 per month; or 2) a monthly lease cost of $1,200 plus 10% of the company's monthly sales revenue. Requirements 1. If the Yummy Delights Factory plans to sell 3,700 cupcakes a month, which lease option would cost less each month? Why? 2. If the company plans to sell 6,500 cupcakes a month, which lease option would be more attractive? Why?

Answer 1

Solution Requirement 1 $ 4 $(2) $ 2 Cupcakes Selling price per unit Less variable cost percuit contribution Margin to find the indifference point, costs of option 1 equal to the I to set the you need to costs of option 2 Hvery $ 3000 - 1200 + 10 4.of ceepcales sod. *:4 = - 3000 -1200 4500 cupcakes. cales Cupcaters » Bolt Working proof Amount ($) 1 3000 lease costs Fixed Variable under option cost. costs . $ 3000 lease osh under option 2 fined wsts. $ 1200 costs. perunit (94x0.1) jes, (4600X0.4) = 1800 variable $ 3000 fc less than Because the number unit is 3700 and is les the 4.500 point of indefference option 2 would be the lowest cost option. option 1 costs a $3000 option 2 costs 1200 + (($ 4X OPS -) 1200 + 1480 = $ 2680

Requirement 2 option 1 is option 1 wst Ophion 2 usb the better option for. 6500 units = $3000 - $1200 + (4.40.1)*6500 = 1200 + 2600 =) $ 3800