Question

Companies that have a high demand for making copies, both color and black and white, often choose to lease a high-end copier that provides fast and reliable service at a reasonable cost. The lease is usually for 3 to 5 years, and the cost to the user is $0.18 per page for black-and-white copies and typically $0.255 per page for color copies. These are the terms of your current 3-year lease contract with Ricoh Company, which is up for renewal this month; the lease terms are expected to be the same for the next 3 years, if renewed.

Hewlett-Packard Company (HP) developed an innovative copier that can reduce the cost of color copies. The copier measures exactly how much color is used in a color copy so that the price of the copy can be determined by the amount of color used rather than a fixed price per page. The cost could be as low as $0.246 per page for a color copy. HP calls this a “flexible-pricing” approach. Assume for this example that the cost of the leased copier (3-year lease) is only the per-page charge—the initial lease cost is negligible, and the service costs would not differ between the HP copier and the copier you are using now.

Your company is an advertising agency, Tanner and Jones LLC, and the quality of the color copies is critical to your business success. The ability to rely on the copier at any time is also very important because some customer requests require urgent attention. You believe that the Ricoh and HP printers are of the same reliability, but you have not had experience with the HP copier to be sure of the copy quality. The demonstration of the HP copier has shown as good or better copy quality, but you have not had 3 years’ experience with it to know what it would be like day-to-day.

Required:

1. Assume that your company is considering the lease of one of these HP copiers, and you expect that the average price for a color copy for your company would be $0.246 because you would carefully prioritize color copy jobs and reduce the number of copies requiring a large amount of color. You expect that training your copy center staff to properly use the new copier would cost about $2,754 for materials and lost work time. What is the breakeven number of color copies per year that would make you indifferent between the new HP copier and your current copier? (Do not round intermediate calculations. Round your answer to the nearest whole number.)

2. As in requirement 1, assume you expect that your per-copy cost for color copies with the HP copier will be $0.246, the training costs are $2,754, and you expect to make 260,000 copies per year for the next 3 years. In your negotiations with Ricoh concerning the new lease and the cost of color copies, what price would you bargain for? (Round your answer to 4 decimal places.)

Answer 1

1. To find out the breakeven number of color copies to make Hp copier and current copier firstly we shall find out the difference in cost of per page of color copy

0.246(HP copier) - 0.255 (Existing copier) = $0.009 is saved per page due to machine.

However $ 2754 [one time expense] is spent for training. per year cost of training $2754/3 years = $918 training cost per year

so we will find out how many pages has to be copied PER YEAR so that $918 can be covered up.

1 page              $0.009 saved

                                                                                =                    $918/$0.009= 1,02,000 copies

??? Page          $918 will be saved

UPTO 1,02,000 Copies we are indifferent between two machines because the cost saved per page is utilised in training the staff.we can check this answer by calculating total cost of 1,02,000 copies.

existing = 1,02,000 *0.255 =$26010

HP copier = 1,02,000*0.246+$918 training cost per year= $26010

2. Total Cost of producing 2,60,000 copies per year for HP copier is

Particulars	Total Cost in $ of three years
2,60,000 copies* 0.246*3years	191880
Training Cost $2754 one time expense	2754
Total Cost of three years	194634 $

Per page cost = $194634/ 7,80,000 copies =0.2495$ / Page.

So we should negotiate with Ricoh company to reduce their per page color copy cost at $0.2495 or lesser.