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.Read the requirements

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.

Requirement 1. What is the​ company's breakeven point under the current leasing​ agreement? What is it under the new​ commission-based agreement?

​First, determine the formula used to calculate the breakeven point in​ units, then calculate the​ company's breakeven point under the current leasing agreement. ​(Enter a​ "0" for any zero​ balances.)

Fixed costs	/	Contribution margin per unit	=	Breakeven number of units
$1,300	/	0.13	=	10,000

What is it under the new​ commission-based agreement? ​(Enter a​ "0" for any zero​ balances.)

The company's breakeven point under the new commission-based agreement is

0

units.

Requirement 2. For what range of sales levels will

FlexoFlexo

prefer​ (a) the fixed lease agreement and​ (b) the commission​ agreement?In order to determine the range of sales levels

FlexoFlexo

would prefer for each​ agreement, we must first calculate the indifference point.

The indifference point =

sales volume at which the income from alternative 1 equals the income from alternative 2.

Now calculate the indifference point. ​(Round to the nearest whole​ number.)

The indifference point is at

32,500

units.

FlexoFlexo

would prefer the fixed lease agreement at

sales more than the indifference point

.The commission based agreement would be preferred at

0 units up to the indifference point

.Requirement 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?

Begin with the fixed leasing agreement. ​(Use parentheses or a minus sign for​ losses.)

Fixed leasing agreement
			Expected
Sales level	Profit/(Loss)		Profit/(Loss)
22,000	$1,560		$312
32,000	$2,860		$572
42,000	$4,160		$832
52,000	$5,460		$1,092
62,000	$6,760		$1,352
Total expected profit/(loss)			$4,160

​Next, calculate the expected profit at each sales level under the commission based agreement.

Commission-based agreement
			Expected
Sales level	Profit/(Loss)		Profit/(Loss)
22,000
32,000
42,000
52,000
62,000
Total expected profit/(loss)

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Answer 1