Plymouth Corp.sells units for $100 each.Variable costs are $75 per unit,and fixed costs are $200,000.If Plymouth leases a new machine,production will be more efficient,saving $5 per unit.If Plymouth plans to sell 12,000 units,at what lease cost will Plymouth be indifferent between leasing and not leasing the new machine?
A)$10,000
B)$40,000
C)$60,000
D)$80,000

Question

Quizplus · Accepted Answer

First, let's calculate the profit without leasing the new machine:
Profit = (Revenue - variable costs) - fixed costs
Profit = ($100 - $75) x 12,000 - $200,000
Profit = $300,000 - $200,000
Profit = $100,000

Now, let's calculate the profit with leasing the new machine:
Profit = (Revenue - variable costs - lease cost) - fixed costs
Profit = ($100 - $75 - $5) x 12,000 - $200,000 - lease cost
Profit = $20,000 - lease cost

To find the lease cost that makes Plymouth indifferent between leasing and not leasing, we set the two profits equal to each other and solve for lease cost:

$100,000 = $20,000 - lease cost
Lease cost = $-80,000

Since a negative lease cost doesn't make sense, we know that leasing the new machine will never be worse than not leasing it. So, we can take the absolute value of $-80,000, which is $80,000, and conclude that if the lease cost is $60,000, Plymouth will be indifferent between leasing and not leasing the new machine. If the lease cost is less than $60,000, leasing will be the better choice, and if the lease cost is greater than $60,000, not leasing will be the better choice. Therefore, the best choice is C) $60,000.