Pike Industries is considering selling excess machinery with a book value of $150,000 (original cost of $475,000 less accumulated depreciation of $325,000) for $72,500less a 5% brokerage commission. Alternatively, the machinery can be leased out for a total of $107,500 for five years, after which it is expected to have no residual value.During the period of the lease, Pike Industries' costs of repairs, insurance, and property tax expenses are expected to be $40,000.a. Prepare a differential analysis report for the lease or sell decision.PIKE INDUSTRIESProposal to Lease or Sell MachineryDifferential Analysis ReportDifferenti revenue from alternatives:Differential cost of alternatives:b. Based on the data presented, which is the most appropriate plan of action?

Selling of the machinery is the most appropriate alternative.

Answered: stries is considering selling excess…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Problem 3-63 (Algo) CVP, Operating Leverage, and Margin of Safety (LO 3-1, 2, 4) 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 $450,000 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 $218 per unit and unit variable cost (excluding any machine lease costs) are $118. Annual fixed costs (excluding any machine lease costs) are $1,458,000. Required: a. What is the annual break-even level assuming 1. The unit-rate lease? 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…

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