Printing Company currently leases its only copy machine for $ 1 comma 300$1,300

Question

Printing Company currently leases its only copy machine for

$ 1 comma 300$1,300

a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement,

FlexoFlexo

would pay a commission for its printing at a rate of

$ 20$20

for every 500 pages printed. The company currently charges

$0.300.30

per page to its customers. The paper used in printing costs the company

$ 0.07$0.07

per page and other variable costs, including hourly labor, amount to

$ 0.10$0.10

per page.

1.

What is the company's breakeven point under the current leasing agreement? What is it under the new commission-based agreement?

2.

FlexoFlexo

3.

FlexoFlexo

22 comma 00022,000,

32 comma 00032,000,

42 comma 00042,000,

52 comma 00052,000,

62 comma 00062,000

FlexoFlexo

choose?

1.

What is the company's breakeven point under the current leasing agreement? What is it under the new commission-based agreement?

2.

FlexoFlexo

3.

FlexoFlexo

22 comma 00022,000,

32 comma 00032,000,

42 comma 00042,000,

52 comma 00052,000,

62 comma 00062,000

FlexoFlexo

1.

What is the company's breakeven point under the current leasing agreement? What is it under the new commission-based agreement?

2.

For what range of sales levels will

FlexoFlexo

prefer (a) the fixed lease agreement and (b) the commission agreement?

3.

FlexoFlexo

estimates that the company is equally likely to sell

22 comma 00022,000,

32 comma 00032,000,

42 comma 00042,000,

52 comma 00052,000,

or

62 comma 00062,000

pages of print. Using information from the original problem, prepare a table that shows the expected profit at each sales level under the fixed leasing agreement and under the commission-based agreement. What is the expected value of each agreement? Which agreement should

FlexoFlexo

choose?

1.

What is the company's breakeven point under the current leasing agreement? What is it under the new commission-based agreement?

2.

For what range of sales levels will

FlexoFlexo

prefer (a) the fixed lease agreement and (b) the commission agreement?

3.

FlexoFlexo

estimates that the company is equally likely to sell

22 comma 00022,000,

32 comma 00032,000,

42 comma 00042,000,

52 comma 00052,000,

or

62 comma 00062,000

pages of print. Using information from the original problem, prepare a table that shows the expected profit at each sales level under the fixed leasing agreement and under the commission-based agreement. What is the expected value of each agreement? Which agreement should

FlexoFlexo

choose?

Explanation / Answer

1. Break-even sales units = Fixed Costs / Contribution Margin per Unit.

Fixed costs per month = $ 1,300.

Contribution margin per page = Selling Price - Variable Costs = $ 0.30 - $ 0.07 - $ 0.10 = $ 0.13.

Flexo Company's current break-even point in unit sales = $ 1,300 / 0.13 = 10,000 pages.

Under the new commission-based arrangement, Fixed cost per month = $ 0.

Contribution margin per unit = $ 0.30 - $ 0.04 - $ 0.07 - $ 0.10 = $ 0.09.

New break-even point in unit sales = $ 0 / $ 0.09 = $ 0.

2. Let Q be the number of pages that Flexo would need to sell for it to be indifferent between the two arrangements.

Q * $ 0.13 - $ 1,300 = Q * $ 0.09 - $ 0

0.04 Q = $ 1,300.

Q = 32,500 pages.

For a range of sales between 0 to 32,500, Flexo Company would prefer the commission arragement, as profit will be higher.

32,499 x $ 0.09 > 32,499 x $ 0.13 - $ 1,300

Beyond sales of 32,500 pages per month, the fixed leasing agreement would be preferred.

3. Expected profit = (Estimated Sales Volume x Unit Contribution Margin ) - Fixed Costs

Estimated Sales Volume Expected Profit: Fixed Leasing ( Alt. I) Expected Profit : Commission Based ( Alt. II) Flexo Should Choose 22,000 pages $ 1,560 $ 1,980 Alt II 32,000 pages 2,860 2,880 Alt. II 42,000 pages 4,160 3,780 Alt. I 52,000 pages 5,460 4,680 Alt. I 62,000 pages 6,760 5,580 Alt. I

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