Question

The Cupcake Heaven Factory plans to open a new retail store in Atlanta, Georgia. The store will sell specialty cupcakes for $3 per cupcake (each cupcake has a variable cost of \$1.) The company is negotiating its lease for the new store. The landlord has offered two leasing options: 1) a lease of $4,000 per month; or 2 ) a monthly lease cost of $2,500 plus 10% of the company's monthly sales revenue.

Requirements
1. If the Cupcake Heaven Factory plans to sell 4,000 cupcakes a month, which lease option would cost less each month? Why?
2. If the company plans to sell 7,000 cupcakes a month, which lease option would be more attractive? Why?
Requirement 1. If the Cupcake Heaven Factory plans to sell 4,000 cupcakes a month, which lease option would cost less each month? Why?
Begin by calculating the indifference point. Select the equation to determine the indifference point. (Abbreviations used: FC=F(xed costs. VCU = Variable costs per unit)
(VCU (option 1) × Units)+FC(option 1) =(VCU (option 2) × Units)+FC(option 2)
The indifference point (in number of cupcakes) is ___.

Answer 1

If selling 4,000 cupcakes a month, option 2 ($3,700) is cheaper than option 1 ($4,000). If selling 7,000 cupcakes a month, option 1 ($4,000) is cheaper than option 2 ($4,600). The optimum lease option depends on the sales volume of the Cupcake Heaven Factory.

Step-by-step explanation:

The Cupcake Heaven Factory is trying to decide between two lease options for a new store based on its expected sales volume of cupcakes. For the first requirement, assuming the sale of 4,000 cupcakes per month, we need to calculate the total cost of each lease option to determine which one is the cheaper alternative.

If Cupcake Heaven Factory sells 4,000 cupcakes at $3 each, the monthly sales revenue would be $12,000. The first lease option costs $4,000 per month with no additional fees, resulting in an overall monthly cost of $4,000. The second lease option costs $2,500 plus 10% of the monthly sales revenue, adding up to $2,500 + (10% of $12,000) = $2,500 + $1,200 = $3,700.

Comparing $4,000 (option 1) with $3,700 (option 2), the second lease option would be the more attractive choice as it costs less each month by $300. For the second requirement, if the sale volume is increased to 7,000 cupcakes, the first lease option remains at a flat $4,000 while the second option would be $2,500 + (10% of $21,000) = $2,500 + $2,100 = $4,600. In this scenario, the first lease option would be more attractive as it has the lower cost.