Question

Composite Printing Company currently leases its only copy machine for $1,700 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement, Composite would pay a commission for its printing at a rate of $25 for every 500 pages printed. The company currently charges $0.30 per page to its customers. The paper used in printing costs the company $0.02 per page and other variable costs, including hourly labor, amount to $0.12 per page. Read the requirements. y under the new commission-based agreement? breakeven point under the current leasing agreement. (Enter a i Requirements 1. 2. What is the company's breakeven point under the current leasing agreement? What is it under the new commission-based agreement? For what range of sales levels will Composite prefer (a) the fixed lease agreement and (b) the commission agreement? Composite estimates that the company is equally likely to sell 19,000, 29,000, 39,000, 49,000, or 59,000 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 Composite choose? (b) the commission agreement? It calculate the indifference point. alternative 2. Print Done The indifference point is at units.

Answer 1

Break even point = Fixed costs/(Selling price per unit – Variable costs per unit)
= 1700/(0.3-0.02-0.12)
=10625 pages
New commission based = 0, since all variable cost
2.Crossover point = Difference in fixed cost/Difference in variable cost
= 1700/(0.05-0) = 34000 pages
The fixed lease agreement will be preferred for sales over 34000 pages
Upto 34000 pages – commission based
3.Profit
Pages	Fixed lease	Commission based
19000	1340	2090
29000	2940	3190
39000	4540	4290
49000	6140	5390
59000	7740	6490
Fixed lease should be chosen as all sales levels are equally likely and average is 39000