Question

• Given the information below, answer questions from #9 to #10.
The owner of Cheesecake Factory at the Forum Shop is renegotiating the operation’s lease and has the option of either (1) an annual fixed lease of $55,000 or (2) an annual fixed lease of $10,000 plus a variable lease set at 5% of annual revenue.

What is the indifference point?

A. $900,000

B. $1,100,000

C. $1,000,000

D. $1,300,000

Which option will cost less for the owner if annual revenue is expected to be $5,000,000?

A. Cannot be determined from the information given

B. The mixed lease (option 2)

C. The fixed lease (option 1)

D. Both options cost the same.

Answer 1

What is the indifferance point?

(1) an annual fixed lease of $55,000

or

(2) an annual fixed lease of $10,000 + 5 % of annual revenue

(a) $10,000 + 5% * $9,00,000 = $10,000 + $45,000 = $55,000

(b) $10,000 + 5% * $11,00,000 = $10,000 + $55,000 = $65,000

(c) $10,000 + 5% * $10,00,000 = $10,000 + $50,000 = $60,000

(d) $10,000 + 5% * $13,00,000 = $10,000 + $65,000 = $75,000

So from the above we can say that with choosing option A at $9,00,000 there is indifferance point between annual fixed lease and mixed lease

So, Indifferance Point A $9,00,000

Answer : A $9,00,000

Which option will cost less for the owner if annual revenue is expected to be $5,000,000

At annual revenue of $5,000,000

no change in fixed lease so

If choose fix lease $55,000

or If choose mixed lease

Fixed lease $10,000 + 5% * $5,000,000

= $10,000 + $2,50,000

= $2,60,000

So from the above caluclation we can say that fixed lease will cost less for the owner if annual revenue expected to be $5,000,000.

Answer: C. Fixed lease (option 1)

A : Information is sufficient to determine so A is wrong.

B : The mixed lease (option 2) will cost $2,60,000 which is higher than fixed lease so again not right answer

C : From the above calulcation we can see cost of the both the options are different so option c is also wrong.