Composite Printing Company currently leases its only copy machine for $ 1,500 a

Question

Composite Printing Company currently leases its only copy machine for $ 1,500 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement. Composite would pay a commission for its printing at a rate of $ 10 for every 500 pages printed. the company currently charges $ 0.25 per page ot its customers. The paper used in printing costs the company $ 0.06 per page and other variable costs, including hourly labor amounting to $0.09 per page. Read the requirements. Requirement 1. What is the company's breakeven point under the current agreement? What is it under new commission-based agreement First, determine the formula used to calculate the breakeven point in units, then calculate the company's breakeven point under the current leasing agreement. What is it under the new commission-based agreement? The company's breakeven point under the new commission-based agreements is For what range of sales levels will composite prefer (a) the fixed lease agreement 9b) the commission agreement? in order to determine the ran greaterthanorequalto of sales levels Composite would prefer for each agreement, we must first calculate the indifference point. the indifference point= Now calculate the indifference point. composite would prefer the fixed lease agreement at

Explanation / Answer

Contribution margin per page assuming current fixed leasing agreement= $0.25 – $0.06 – $0.09 = $0.1 per page

Fixed costs = $1,500

Breakeven point =Fixed costs/Contribution margin per page

$1,500/$0.1 per page

=15,000 pages

Contribution margin per page assuming $10 per 500 pagecommission agreement = $0.25 – $0.02x– $0.06 – $.09

= $0.08 per page

Fixed costs = $0

Breakeven point =Fixed costs/Contribution margin per page

=0/$0.08 per page

=0 pages

x Deckle makes a profit no matter how few pages it sells)a$10¸/500 pages = $0.02 per page

Calculate the point of indifference:

Lease agreement -- fixed cost of $1,500 per month

Let the unit at which it is indifferent be X

Sales -TVC - TFC = P1

$.25(X) - ($.06 + $.09)(X) - $1,500 = P1

$.1X - $1,500 = 1

Commission based agreement -- $10 per 500 pages, $10/500 = $.02 per page

Sales -TVC - TFC = P2

$.25(X) - ($.06 + $.09 + $.02)(X) - $0 = P2

$.25X - $.17X - $0 = P2

$.08X = P2

At the point of indifference P1 = P2, therefore

Lease agreement: $.1X - $1,500 = P

Commission agreement: $.08X = P

$.1X - $1,500 = $.08X

$.02X -$1,500 = 0

$.02X = $1,500

X = $1,500/$.02 =

75,000

pages/month

Thus Stylewise would prefer commission agreement from 0 to 50,000 pages.

and lease agreement above 50,000. Stylewise is indifferent at 75,000 units.

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