Profitability Analysis

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*Category:* **Profitability analysis 2-3**

1) Greenfield Properties is evaluating two different leasing options for office space. The company is considering which option will be more cost-effective based on projected office usage. The options are:

- Lease Option A: A fixed monthly lease payment of $4,000.
- Lease Option B: A variable lease payment of $5 per square foot of office space used.

Greenfield Properties expects that their office space usage will vary. At what level of office space usage (in square feet) would it make no difference to Greenfield Properties which lease option they choose?

To determine at what level of office space usage the costs of both lease options will be the same, set the fixed monthly lease payment equal to the variable lease payment:

- Fixed Monthly Lease (Option A): $4,000
- Variable Lease (Option B): $5 per square foot

Let Y be the office space usage where the two options cost the same:

4,000 = 5 × Y

Y = 4,000 / 5

Y= 800

Thus, at an office space usage of 800 square feet, the total costs of both leasing options will be equivalent.

To determine at what level of office space usage the costs of both lease options will be the same, set the fixed monthly lease payment equal to the variable lease payment:

- Fixed Monthly Lease (Option A): $4,000
- Variable Lease (Option B): $5 per square foot

Let Y be the office space usage where the two options cost the same:

4,000 = 5 × Y

Y = 4,000 / 5

Y= 800

Thus, at an office space usage of 800 square feet, the total costs of both leasing options will be equivalent.

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*Category:* **Profitability Analysis 2-1**

2) FashionForward, a retail clothing store, is setting prices for its new line of designer jackets. The cost of each jacket is $100. The store decides to use a markup pricing strategy, applying a markup of 50% on the cost. The store also wants to understand the profit margin associated with this pricing strategy.

Given that the cost of each jacket is $100 and the markup percentage is 50%, which of the following statements correctly describes the markup and profit margin for the jackets?

In the given case, FashionForward uses a markup pricing strategy. Here’s how the markup and profit margin are calculated:

Markup = Cost × Markup Percentage = $100 × 0.50 = $50

Thus, the selling price is:

Selling Price = Cost + Markup = $100 + $50 = $150

Profit Margin: The profit margin is calculated as the ratio of profit to the selling price. Profit is the difference between the selling price and the cost:

Profit = Selling Price − Cost = $150 − $100 = $50

The profit margin is then:

Profit Margin = (Profit / Selling Price) x 100

Profit Margin =$50 / $150 × 100% = 33.33%

In the given case, FashionForward uses a markup pricing strategy. Here’s how the markup and profit margin are calculated:

Markup = Cost × Markup Percentage = $100 × 0.50 = $50

Thus, the selling price is:

Selling Price = Cost + Markup = $100 + $50 = $150

Profit Margin: The profit margin is calculated as the ratio of profit to the selling price. Profit is the difference between the selling price and the cost:

Profit = Selling Price − Cost = $150 − $100 = $50

The profit margin is then:

Profit Margin = (Profit / Selling Price) x 100

Profit Margin =$50 / $150 × 100% = 33.33%