On January 1, 2021 a company enters a 12-month lease contract for a new laser copier machine. The lease contract legally binds the company to make twelve $2,500 monthly lease payments at the beginning of each month January 1 through December 1, 2021.

a. On December 31, 2020 before the lease contract is signed, what is the avoidable cost of leasing the machine for the 2021 production period? What is the economic cost?

b. After the lease contract is signed on January 1, what is the avoidable cost of using the machine for the rest of 2021? What is the economic cost?

Now suppose the lease agreement is modified by adding a clause that gives the company the right to rent the laser copier to another company during 2021 lease period. The machine can be rented for $1,000 per month.

c. What is the amount of the sunk cost on January 1 after the lease is signed?

d. What is the amount of the sunk cost on August 1?

e. What is the monthly avoidable (and economic) cost of using the laser copier machine when the lease includes this rental clause?

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Quiz a The avoidable cost of leasing the machine for the 2021 production period is 112500 The econom... View the full answer