A company wants to open a new store in one of three nearby shopping malls. In Mall A, the rent will be $300,000 per year. In Mall B, the rent will be ... Accounting MCQs | Accounting MCQs

A company wants to open a new store in one of three nearby shopping malls. In Mall A, the rent will be $300,000 per year. In Mall B, the rent will be 4% of gross revenues. In Mall C, the rent will be $150,000 per year plus 3% of gross revenues. Assume that revenues and all other elements under consideration are the same for all three malls.
What is the maximum level of revenues at which Mall C will be the most desirable of the three options?

$149,999$5,000,000$15,000,000Mall C will never be the most desirable choice.Show Result

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Detailed Answer

Answer (D) is correct. Mall C will never be the optimal choice because it will be less desirable than
Mall B as long as 1% of gross revenue is less than $150,000, that is, until revenues reach $15,000,000 [$150,000 minimum ÷ (4% – 3%)]. However, at any level of revenues greater than $7,500,000 ($300,000 ÷ 4%), Mall A (a flat $300,000 rental) will be more desirable than either of the other choices. Thus, Mall C will never be the most desirable.