expansion via leasing Retum to problem 14 of Chapter 14, Consumer, Inc. A competitor, experiencing bad times, has ofIered to lease Consumer, Inc., produetive capaeity thatwill inerease the assembly eapacity from 600,000 to 650,000 direet labor hours. This is a 4-year, noneancellable lease. The annual payment is 750,000, due at the start of eaeh year. For aecounting purposes this would be treated as a capitalIease, though for tax purposes it is an operating Iease. (Ralph will treat this as a deduetible tax expense at the end of the year.) The marginaI tax rate is 45%, and the appropriate after tax discount rate is 10%.

a] Using the 4 estimates ofproduet protitability (the originaI full eosting approaeh, managements' subjeetive estimate, the regression estimates, and the tirm-wide overhead pool approaeh), determine the value of agreeing to the lease arrangement.

b] Mterthe excitement settles down, those who advoeated the originaI short-run plan based on full eosting beeome argumentative. They cJaim that at this juneture the full costing approaeh is more valid beeause long-run adjustments wilJ necessitate long-run adjustments in the overhead strueture. CarefuIly analyze their argument.

e] Suppose the Iease is signed. Describe the treatment that the typical aecounting library would apply to the arrangement.

AppendixLO1