C&A has to decide whether to build a new facility or lease space in an existing
ID: 429276 • Letter: C
Question
C&A has to decide whether to build a new facility or lease space in an existing plaza for its tax services. If the facility is built, C&A will incur fixed costs of $60,000 and variable costs of $100 per client. If the facility is leased, its fixed costs will go down to $40,000 but its variable costs will become $150 per client. C&A charges $500 per client. The level of demand for C&A s tax services fluctuates depending on the following state of the economy:
State of the economy
Demand level
Likelihood
Best
1000
0.4
Worst
100
0.6
If C&A decides to lease and the economy turns out to be in its best state, C&A can further decide whether or not to lease more space for an additional costs of $15,000 to have enough capacity to serve 1,000 more clients. Which of the following statements about the decision to lease space in an existing plaza is true?
C&A will have a loss of $5,000 if the economy is at its worst.
C&A will have a loss of $20,000 if the economy is at its worst.
C&A will have a profit of $310,000 if the economy is at its best.
Both a and c
Both b and c
State of the economy
Demand level
Likelihood
Best
1000
0.4
Worst
100
0.6
Explanation / Answer
option D is correct.
because, if it goes for leased facility, then the total costs becomes
total fixed cost= $40,000
variable cost= $150 and the number of clients 1000
so, the total variable cost= 150*1000= $150,000
now the total cost= 150,000+40,000= $190,000
the total revenue for 1000 clients= 1000*$500= $500,000
net benefit= 500,000- 190,000= $310,000 benefit
if the economy is worst the revenues are = 100*500= $50,000
the costs are = 40,000+ 100*150= $55,000
now they will get $5000 loss
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