Question

Solar Entertainment is a provider of cable, Internet, and on-demand video services. Solar currently sends monthly bills to its customers via the postal service. Because of a concern for the environment and recent increases in postal rates, Solar 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.) Although Solar would like to switch to 100% paperless billing, many of its customers are not comfortable with paperless billing or may not have online access, so the paper billing option will remain regardless of whether Solar adopts a paperless billing system or not The cost of the paperless billing system would be $220,600 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 900,000 bills per quarter (more than 900,000 bills per quarter would require a different computer system and is outside the scope of the current situation at Solar) The company has gathered its cost data for the past year by quarter for paper, toner cartridges, printer maintenance costs, and postage costs for its billing department. The cost data are as follows: (Click the icon to view the data.) Read the requirements Requirement 1. Calculate the variable cost per bill mailed under the current paper-based billing system. The variable cost per bill mailed under the current paper-based billing system is $

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Answer 1

1. Variable Cost per bill = ($810000-689400)/(750000-616000) = $0.90 per bill
Fixed Cost = $810000 - 750000 x 0.9 = $135000

2.

Savings from Paper less billing	$        2,80,800	=780000*40%*0.9
Additional Fixed Expenses	$       -2,20,600
Net Savings	$           60,200

3.

Savings from Paper less billing	$        2,10,600	=780000*30%*0.9
Additional Fixed Expenses	$       -2,20,600
Net Savings	$          -10,000

No the company should not offer paperless billing, since additional costs are higher than savings