Answer:
Explanation:
a)
1. Unit rate lease
Unit Contribution margin = Unit Selling price – Unit Variable cost
= 40 - 24 = $16
Break even point (units) = Fixed cost/Contribution margin per unit
= 200,000/16 = 12,500
2. Flat rate lease
Unit Contribution margin = Unit Selling price – Unit Variable cost
= 40 - 20 = $20
Break even point (units) = Fixed cost/Contribution margin per unit
= 260,000/20 = 13,000
b.)
Let at X units produced profit margin is same under both the lease options
40X - 24X - 200,000 = 40X - 20X - 260,000
16X - 200,000 = 20X - 260,000
4X = 60,000
X = 15,000
If 15,000 units are produced, profit margin will be same under both the lease options.
c)
1. Unit rate lease
Contribution margin income statement
Sales (20,000 x 40) 800,000
Variable cost (20,000 x 24) - 480,000
Contribution margin 320,000
Fixed cost - 200,000
Operating income 120,000
Operating leverage = Contribution margin/Operating income
= 320,000/120,000 = 2.67
2. Flat rate lease
Contribution margin income statement
Sales (20,000 x 40) 800,000
Variable cost (20,000 x 20) - 400,000
Contribution margin 400,000
Fixed cost - 260,000
Operating income 140,000
Operating leverage = Contribution margin/Operating income
= 400,000/140,000 = 2.86
d)
1. Unit rate lease
Margin of safety = Actual sales - Break even sales
= 20,000 x 40 - 12,500 x 40
= 800,000 - 500,000
= $300,000
Margin of safety (%) = Margin of safety/Actual sales
= 300,000/800,000 = 37.5%
2. Flat rate lease
Margin of safety = Actual sales - Break even sales
= 20,000 x 40 - 13,000 x 40
= 800,000 - 520,000
= $280,000
Margin of safety (%) = Margin of safety/Actual sales
= 280,000/800,000
= 35%
