Question

Printing Company currently leases its only copy machine for

$ 1 comma 300$1,300

a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new​ agreement,

FlexoFlexo

would pay a commission for its printing at a rate of

$ 20$20

for every 500 pages printed. The company currently charges

​$0.300.30

per page to its customers. The paper used in printing costs the company

$ 0.07$0.07

per page and other variable​ costs, including hourly​ labor, amount to

$ 0.10$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 FlexoFlexo prefer​ (a) the fixed lease agreement and​ (b) the commission​ agreement?
3.	FlexoFlexo estimates that the company is equally likely to sell 22 comma 00022,000​, 32 comma 00032,000​, 42 comma 00042,000​, 52 comma 00052,000​, or 62 comma 00062,000 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 FlexoFlexo ​choose? 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 FlexoFlexo prefer​ (a) the fixed lease agreement and​ (b) the commission​ agreement? 3. FlexoFlexo estimates that the company is equally likely to sell 22 comma 00022,000​, 32 comma 00032,000​, 42 comma 00042,000​, 52 comma 00052,000​, or 62 comma 00062,000 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 FlexoFlexo ​choose?

Answer 1

1. Break-even sales units = Fixed Costs / Contribution Margin per Unit.

Fixed costs per month = $ 1,300.

Contribution margin per page = Selling Price - Variable Costs = $ 0.30 - $ 0.07 - $ 0.10 = $ 0.13.

Flexo Company's current break-even point in unit sales = $ 1,300 / 0.13 = 10,000 pages.

Under the new commission-based arrangement, Fixed cost per month = $ 0.

Contribution margin per unit = $ 0.30 - $ 0.04 - $ 0.07 - $ 0.10 = $ 0.09.

New break-even point in unit sales = $ 0 / $ 0.09 = $ 0.

2. Let Q be the number of pages that Flexo would need to sell for it to be indifferent between the two arrangements.

Q * $ 0.13 - $ 1,300 = Q * $ 0.09 - $ 0

0.04 Q = $ 1,300.

Q = 32,500 pages.

For a range of sales between 0 to 32,500, Flexo Company would prefer the commission arragement, as profit will be higher.

32,499 x $ 0.09 > 32,499 x $ 0.13 - $ 1,300

Beyond sales of 32,500 pages per month, the fixed leasing agreement would be preferred.

3. Expected profit = (Estimated Sales Volume x Unit Contribution Margin ) - Fixed Costs

Estimated Sales Volume	Expected Profit: Fixed Leasing ( Alt. I)	Expected Profit : Commission Based ( Alt. II)	Flexo Should Choose
22,000 pages	$ 1,560	$ 1,980	Alt II
32,000 pages	2,860	2,880	Alt. II
42,000 pages	4,160	3,780	Alt. I
52,000 pages	5,460	4,680	Alt. I
62,000 pages	6,760	5,580	Alt. I