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 $468,000 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 $236 per unit and unit variable cost (excluding any machine lease costs) are $136. Annual fixed costs (excluding any machine lease costs) are $1,476,000.

Required:

a. What is the annual break-even level assuming

1. 1. The unit-rate lease?
2. 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 39,000 parts. What is the operating leverage assuming

1. 1. The unit-rate lease?
2. 2. The flat-rate lease?

e. Assume an annual volume of 39,000 parts. What is the margin of safety assuming

1. 1. The unit-rate lease?
2. 2. The flat-rate lease?