Scenario: Tea-Time (TT) is a West Coast tea distributor. TT is looking to open a retail tea store in the Los Angeles area.

They are considering two locations: one in Santa Monica, Los Angeles, CA, and one in Calabasas, CA.

The location size and the estimated costs for each location are shown below in Exhibit 1.

Because the Santa Monica location is smaller there is less onsite storage, requiring more frequent vendor tea deliveries and therefore higher per cup tea costs. And because of the smaller size, the staffing of the Santa Monica location is smaller resulting in lower staffing costs than Calabasas.

Exhibit 1	Santa Monica (SM)	Calabasas (CAB)
Sales Price / Cup	$4.00	$4.00
Variable Cost / Cup	$1.10	$0.60
Monthly Fixed Staffing Cost $	$8,800.00	$9,200.00
SQFT	600	2,400
Annual $ / SQFT for rent incl Utilities	$40.00	$23.00

Calculate the missing chart values for question letter A. Show your work/assumptions.

A) What is the annual breakeven in sales $ for each location? (Round 2 decimal places)

		Santa Monica (SM)	Calabasas (CAB)
Annual Breakeven in Sales $

Carefully calculate the correct value for the following question. Show your work/assumptions.

B) What is the monthly unit sales volume (in cups of tea sold), which would make Micheal James, TT's CEO, indifferent as to which location to choose?

Carefully calculate the correct value in order to select the correct answer choice for the following question. Show your work/assumptions.

C) If the monthly sales volume in units is expected to be 8,000 cups of tea sold at each location, which location generates a greater operating profit?

• Santa Monica (SM)
• Calabasas (CAB)
• Neither one. 8,000 cups is the Point of Indifference

D) Which answer below best describes your answer to Question C above? (Select the correct statement which means that a single statement could be correct, two statements could be correct, or none of the statements could be correct

1. When sales volume is higher than the point of indifference between two alternatives, the alternative with the higher fixed costs and lower variable cost per unit will always produce the higher operating profit.
2. When sales volume is higher than the point of indifference between two alternatives, the alternative with the lower fixed costs and higher variable cost per unit will always produce the higher operating profit.
3. When sales volume is lower than the point of indifference between two alternatives, the alternative with the higher operating leverage and higher variable costs will always produce the higher operating profit.
4. When sales volume is lower than the point of indifference between two alternatives, the alternative with the lower operating leverage and lower variable costs will always produce the higher operating profit.
5. 1 & 3
6. 2 & 3
7. 1 & 4
8. None of the above