In: Accounting
Direct Printing Company currently leases its only copy machine for $1,600 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement, Direct would pay a commission for its printing at a rate of $ 10 for every 500 pages printed. The company currently charges $0.19 per page to its customers. The paper used in printing costs the company $ 0.01 per page and other variable costs, including hourly labor, amount to $ 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. |
For what range of sales levels will Direct prefer (a) the fixed lease agreement and (b) the commission agreement? |
3. |
Direct estimates that the company is equally likely to sell 26,000, 36,000, 46,000, 56,000, or 66,000 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 Direct choose? |
1) | Current leasing agreement | |||||
Charges from customer | 0.19 | |||||
Printing cost | 0.01 | |||||
Variable cost | 0.1 | |||||
Less | Total cost | 0.11 | (0.01+0.1) | |||
Contribution | 0.08 | (0.19-0.11) | ||||
Fixed lease payment | 1600 | |||||
Breakeven point = Fixed cost/Contribution per unit= 1600/0.08 = 20,000 units | ||||||
Under new agreement | ||||||
Charges from customer | 0.19 | |||||
Printing cost | 0.01 | |||||
Variable cost | 0.1 | |||||
Commission ( 10, for 500) | 0.02 | |||||
Less | Total cost | 0.13 | (0.01+0.1+0.02) | |||
Contribution | 0.06 | (0.19-0.13) | ||||
Breakeven point = Fixed cost/Contribution per unit= 0/0.06 = 0 | ||||||
Sale of 1 unit will give profit | ||||||
2) | ||||||
Here we will calculate indifference point | ||||||
Suppose no of units is (x) | ||||||
0.19- 0.11(x)- 1600 = | 0.19-0.13(x) | |||||
0.02(x) = | 1600 | |||||
(x) = | 80000 | |||||
Sales between 0 to 80,000 units , both options could be prefered | ||||||
Fixed leasing agreement | ||||||
3) | a) | b) | c) | d) | e) | f) |
Sales level | Contribution per unit (0.08) | Fixed cost | Profit/Loss (b-c) | Probability | Expected profit | |
26000 | 2080 | 1600 | 480 | 0.2 | 96 | |
36000 | 2880 | 1600 | 1280 | 0.2 | 256 | |
46000 | 3680 | 1600 | 2080 | 0.2 | 416 | |
56000 | 4480 | 1600 | 2880 | 0.2 | 576 | |
66000 | 5280 | 1600 | 3680 | 0.2 | 736 | |
Total | 10400 | 2080 | ||||
New agreement based on commission | ||||||
a) | b) | c) | d) | e) | f) | |
Sales level | Contribution per unit (0.06) | Fixed cost | Profit/Loss (b-c) | Probability | Expected profit | |
26000 | 1560 | 0 | 1560 | 0.2 | 312 | |
36000 | 2160 | 0 | 2160 | 0.2 | 432 | |
46000 | 2760 | 0 | 2760 | 0.2 | 552 | |
56000 | 3360 | 0 | 3360 | 0.2 | 672 | |
66000 | 3960 | 0 | 3960 |
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