Stella’s Steak House has been operating for the past 10 years, and Stella has to negotiate her lease on the premises for the next 5 years. Her options are to pay a fixed monthly rent of $2,800 or to pay a variable monthly rent of 8% of her sales revenue. Over the next 5 years she anticipates her sales to average $525,000 per year.

a. What is Stella’s indifference point on an annual sales revenue basis?

b. Which option should she choose? Explain.

LO1