Question

In: Accounting

Direct Printing Company currently leases its only copy machine for $1,600 a month. The company is...

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?

Solutions

Expert Solution

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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