Part A: Lease Evaluation

Farmer Furrow is considering an investment in frog farming. Market research indicates that frog meat is in demand in chic city restaurants, and frog hides and skins make excellent, vogue leather products. Farmer$$s trading entity is a proprietary company.

Farmer Furrow plans to either purchase the frog farm plant or alternatively lease it$.$ The project has a life of $5$ years.

Purchase Details:

The purchase price of plant, ponds, water reticulation equipment and stock will be $$120,000.$ This equipment will have a NIL residual value after $5$ years. The equipment is depreciated at $20\%$ p$.$a$.$ prime cost for tax purposes.

Lease Details:

The lease contract requires payment in advance of $$30,000$ p$.$a$.$ The lease period is $5$ years. There is no residual on the lease.

The company tax rate is $20\%$ in the year of income. Farmer requires $10\%$ p$.$a$.$ return on any investment.

Required:

a$.$ Which is the best option, lease or buy?

Part B: Break Even Analysis

Traves Company produces one type of machine with the following costs and revenues for the year:

Total Revenues $$8,000,000$

Total Fixed Cost $$1,200,000$

Total Variable Cost $$3,200,000$

Total Units Produced and Sold $800,000$

Required:

a$.$ What is the selling price per unit?

b$.$ What is the variable per unit?

c$.$ What is the contribution margin per unit?

d$.$ What is contribution margin ratio?

e$.$ What is the breakeven point in units and dollars?

f$.$ How many units must be sold for Traves to make an Operating Profit of $$2,000,000$ for the year?

g$.$ What is the margin of safety ratio and percentage when actual sales is $$9,500,000?$