Question

URGERNT

	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Total paper, toner, printer
maintenance, and postage costs . . .	$633,000	$645,000	$780,000	$660,000
Total number of bills mailed . . . . . . . . . .	545,000	585,000	720,000	600,000

1.	Calculate the variable cost per bill mailed under the current​ paper-based billing system.
2.	Assume that the company projects that it will have a total of 800,000 bills to mail in the upcoming quarter. If enough customers choose the paperless billing option so that 25​% of the mailings can be converted to​ paperless, how much would the company save from the paperless billing system​ (be sure to consider the cost of the paperless billing​ system)?
3.	What if only 5​% of the mailings are converted to the paperless option​ (assume a total of 800,000 ​bills)? Should the company still offer the paperless billing​ system? Explain your rationale.

Sky Entertainment is a provider of​ cable, Internet, and​ on-demand video services. Sky currently sends monthly bills to its customers via the postal service. Because of a concern for the environment and recent increases in postal​ rates, Sky management is considering offering an option to its customers for paperless billing. In addition to saving​ printing, paper, and postal​ costs, paperless billing will save energy and water​ (through reduced paper​ needs, reduced waste​ disposal, and reduced transportation​ needs.) While Sky would like to switch to​ 100% paperless​ billing, many of its customers are not comfortable with paperless billing or may not have Web​ access, so the paper billing option will remain regardless of whether Sky adopts a paperless billing system or not.

The cost of the paperless billing system would be $112,800 per quarter with no variable costs since the costs of the system are the salaries of the clerks and the cost of leasing the computer system. The paperless billing system being proposed would be able to handle up to 1,040,000 bills per quarter​ (more than 1,040,000 bills per quarter would require a different computer system and is outside the scope of the current situation at Sky​.) Sky has gathered its cost data for the past year by quarter for​ paper, toner​ cartridges, printer maintenance​ costs, and postage costs for the billing department. The cost data is as​ follows:

Requirement 1. Calculate the variable cost per bill mailed under the current​ paper-based billing system.

Using the​ high-low method, the variable cost per bill mailed under the current​ paper-based billing system is ​$...? .

​Requirement 2. Assume that the company projects that it will have a total of 800,000 bills to mail in the upcoming quarter. If enough customers choose the paperless billing option so that 25​% of the mailings can be converted to​ paperless, how much would the company save from the paperless billing system​ (be sure to consider the cost of the paperless billing​ system)?The company would save ​$........? from using the paperless billing system.

Requirement 3. What if only 15​% of the mailings are converted to the paperless option​ (assume a total of 800,000 ​bills)? Should the company still offer the paperless billing​ system? Explain your rationale. ​(Enter any losses as a positive​ number.) If only 15​% of the mailings are converted to the paperless​ option, the company ......? should continue to should no longer offer the paperless billing system because the company ........? loses saves ​$......? from using the paperless billing system.

Answer 1

1. Using the High-low method

Variable cost per bill mailed under the current​ paper-based billing system=

(780000-633000)/(720000-545000)=

0.84

2..25% converted to paperless:
Costs under the current​ paper-based billing system =800000*0.84=	672000
Under 25% paper less opted:
costs for 25%*800000=200000	112800
Costs for balance 600000*0.84	504000
Total costs for 25% opted for paper-less	616800
Savings in costs=(672000-616800)=	55200

3..Only 15% converted to paperless:
Costs under the current​ paper-based billing system =800000*0.84=	672000
Under 15% paper less opted:
costs for 15%*800000=120000	112800
Costs for balance 680000*0.84	571200
Total costs for 15% opted for paper-less	684000
Loss in costs=(672000-684000)=	12000

If only 15​% of the mailings are converted to the paperless​ option, the company SHOULD NO LONGER offer the paperless billing system because the company LOSES from using the paperless billing system.