A resort hotel has total annual sales revenue of $1,000,000, variable costs of $350,000, and fixed costs of $750,000. The fixed costs include $80,000 a year for land rental lease. The landowner offered an alternative variable rent based on 10% of the revenue.
a. If the management accepts this proposal, what would be the new breakeven point? (Hint: Acceptance of the variable lease will reduce fixed costs by $80,000 and increase variable costs by 10%.)
b. What is the indifference point?
c. Explain whether management should accept this proposal if next years total sales revenue is expected to be $1,200,000.