Question

Canton Corp. produces a part using an expensive proprietary machine that can only be leased. The leasing company offers two contracts. The first (unit-rate lease) is one where Canton would pay $23 per unit produced, regardless of the number of units. The second lease option (flat-rate lease) is one where Canton would pay $345,000 per month, regardless of the number produced. The lease will run one year and the lease option chosen cannot be changed during the lease. All other lease terms are the same. The part sells for $230 per unit and unit variable cost (excluding any machine lease costs) are $115. Monthly fixed costs (excluding any machine lease costs) are $607,200. Required: a. What is the monthly break-even level assuming: 1. The unit-rate lease? 2. The flat-rate lease? b. At what volume would the operating profit be the same regardless of the lease option chosen? c. Assume monthly volume of 29,500 units. What is the operating leverage assuming: 1. The unit-rate lease? 2. The flat-rate lease? d. Assume monthly volume of 29,500 units. What is the margin of safety percentage assuming: 1. The unit-rate lease? 2. The flat-rate lease?

Answer 1

solution (1) Unit rate lease of compute monthly break even level. Unit contribution on margin= unit selling price - unit variable cost = 230 – (115+23) = 230- 138 -$92 Breaks even point Onits) = fixed cost contribution on margin per unit G07200 92 = 6600 (2)=) flat rate lease i unit contribution margin = unit selling poice unit rasible cost = 220-115 $115 Break even point units) = Fixed cost contribution margin per mit

607200 + 345 000 = 8280 (b) Let &- units under both produced the lease profit margin is options. Same 230% – 188 * - 607200 = 230X - 116X-952200 92% - 607200 – 1157-952200 1155 -92x = 952200-607200 23= 345000 * = BUSDOO . 23 (x = 15000] Hence, if 15000 units are produced, profit margin will be same under both the lease optionc

Cu unit rate lease of prepare contribution margin income statement 6785000 407 1000 $2714000 Sales (29500X230) Less: variable cast (295008138] contribution margin Lessa fixed cost Operating income 607200 $ 2106800 operating leverage = contribution margin operating income. 2719000 2106 800 128 (2) 6785000 3392500 Sales (29500 x 230) Less-variable cost (29500x115) contribution margin Less fixed cost operating cost income 13 3392 500 952200 $2440300

operating levarage = contribution margin operating income 3392500 2440300 = 1:39 ca unit rate leases Margin of safety = actual sales-Break even - sales = 29500X230) 46600x 230) = 6785000 – 1518000 = 5267000 Margin of safety (a)= margin of safety Actual sales. 5267000 6785000 = 0.7762 577.62%

flat rate lease r Margin of safety = actual sales-Break even sales = (29500x 230) – (828014230) - 6785000 - 1904400 = 4880600 Margin of safety (7)= Margin of safety actual sales. = 4880 600 6785ovo = 0-7193 -71.93%