Problem 3-63 (Algo) CVP, Operating Leverage, and Margin of Safety (LO 3-1, 2, 4) Maryland Manufacturing (M2) 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 M2 would pay $20 per unit produced, regardless of the number of units. The second lease option (flat-rate lease) is one where M2 would pay $450,000 annually, 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. M2 sells the part for $218 per unit and unit variable cost (excluding any machine lease costs) are $118. Annual fixed costs (excluding any machine lease costs) are $1,458,000. Required: a. What is the annual break-even level assuming 1. The unit-rate lease? 2. The flat-rate lease? b. At what annual volume would the operating profit be the same regardless of the royalty option chosen? c. Suppose M2 is unsure of the pricing and costs for the part (other than the costs of the lease under the two payment options). At what annual volume would the operating profit be the same regardless of the lease payment option chosen? d. Assume an annual volume of 34,500 parts. What is the operating leverage assuming 1. The unit-rate lease? 2. The flat-rate lease? e. Assume an annual volume of 34,500 parts. What is the margin of safety assuming 1. The unit-rate lease? 2. The flat-rate lease?

Plymouth corporation sells units for $108 each Variable costs are $39 per unit, and fixed costs are $212,000. If Plymouth leases a bed cast wail increase by $85,000 a year, but production will be more efficient, saving $5 per unit. At what level of production will Plymouth be indifferent between leasing and not leasing the new machine?

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Problem 3-63 (Algo) CVP, Operating Leverage, and Margin of Safety (LO 3-1, 2, 4) Maryland Manufacturing (M2) 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 M2 would pay $20 per unit produced, regardless of the number of units. The second lease option (flat-rate lease) is one where M2 would pay $450,000 annually, 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. M2 sells the part for $218 per unit and unit variable cost (excluding any machine lease costs) are $118. Annual fixed costs (excluding any machine lease costs) are $1,458,000. Required: a. What is the annual break-even level assuming 1. The unit-rate lease? 2. The flat-rate lease? b. At what annual volume would the operating profit be the same regardless of the royalty option chosen? c. Suppose M2 is…

Problem 3-63 (Algo) CVP, Operating Leverage, and Margin of Safety (LO 3-1, 2, 4) Maryland Manufacturing (M2) 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 M2 would pay $20 per unit produced, regardless of the number of units. The second lease option (flat-rate lease) is one where M2 would pay $450,000 annually, 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. M2 sells the part for $218 per unit and unit variable cost (excluding any machine lease costs) are $118. Annual fixed costs (excluding any machine lease costs) are $1,458,000. Required: a. What is the annual break-even level assuming 1. The unit-rate lease? 2. The flat-rate lease? b. At what annual volume would the operating profit be the same regardless of the royalty option chosen? c. Suppose M2 is…

14. Asset betas (S9.3) Which of these projects is likely to have the higher asset beta, other things equal? Why? a. The sales force for project A is paid a fixed annual salary. Project B's sales force is paid by commissions only. b. Project C is a first-class-only airline. Project D is a well-established line of breakfast cereals.