A news clipping service is considering modernization. Rather than manually clipp

Question

A news clipping service is considering modernization. Rather than manually clipping and photocopying articles of interest and mailing them to its clients, employees electronically input stories from most widely circulated publications into a database. Each new issue is searched for key words, such as a client's company name, competitors' names, type of business, and the company's products, services, and officers. When matches occur, affected clients are instantly notified via an online network. If the story is of interest, it is electronically transmitted, so the client often has the story and can prepare comments for follow-up interviews before the publication hits the street. The manual process has fixed costs of $420 comma 000 per year and variable costs of $6.10 per clipping mailed. The price charged to the client is $8.00 per clipping. The computerized process has fixed costs of $1 comma 200 comma 000 per year and variable costs of $2.30 per story electronically transmitted to the client. a. If the same price is charged for either process, what is the annual volume beyond which the automated process is more attractive?

Explanation / Answer

Given values:

Manual process:

Fixed cost = $420,000 per year

Variable cost = $6.10 per clipping mailed

Computerized process:

Fixed cost = $1,200,000 per year

Variable cost = $2.30 per story

Price charged = $8.00 per clipping

Solution:

If the same price is charged for either process, the annual volume beyond which the automated process is more attractive can be found using the breakeven analysis. At the breakeven point, the total cost of both the manual process and the computerized process will be equal.

Let the breakeven quantity be represented by Q. Therefore, at the breakeven point,

Total cost of manual process = Total cost of computerized process

$420,000 + $6.10 Q = $1,200,000 + $2.30 Q

3.8 Q = 780,000

Q = 205,263 units

Therefore, the automated process will be more attractive beyond the annual volume of 205,263 units of clippings because then the total cost of automated process will be lower than the total cost of manual process.

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