Problem $3-63($Algo$)$ CVP$,$ Operating Leverage, and Margln of Safety $($LO $3-1,2,4)$

Maryland Manufacturing $($M$2)$ 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 M$2$ would pay $$20$ per unit produced, regardless of the number of units.

The second lease option $($flat$-$rate lease$)$ is one where M$2$ would pay $$466,000$ 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.

M$2$ sells the part for $$234$ per unit and unit variable cost $($excluding any machine lease costs$)$ are $$134.$ Annual fixed costs $($excluding

any machine lease costs$)$ are $$1,474,000.$

Requlred:

$.$ What is the annual break$-$even level assuming

The unit$-$rate lease?

The flat$-$rate lease?

b$.$ At what annual volume would the operating profit be the same regardless of the royalty option chosen?

c$.$ Suppose M$2$ 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 $38,500$ parts. What is the operating leverage assuming

The unit$-$rate lease?

The flat$-$rate lease?

e$.$ Assume an annual volume of $38,500$ parts. What is the margin of safety assuming

The unit$-$rate lease?

The flat$-$rate lease?

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What is the annual break$-$even level assuming