Question

Bristol Printing Company currently leases its only copy machine for $1,200 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement, Bristol would pay a commission for its printing at a rate of $20 for every 500 pages printed. The company currently charges $0.32 per page to its customers. The paper used in printing costs the company $0.11 per page and other variable costs, including hourly labor, amount to $0.13 per page. Read the requirements. Requirements - X t under the new commission-based agreement? breakeven point under the current leasing agreement. (Enter a 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 Bristol prefer (a) the fixed lease agreement and (b) the commission agreement? Bristol estimates that the company is equally likely to sell 30,000, 40,000, 50,000, 60,000, or 70,000 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 Bristol choose?

Answer 1

1. What is the company's breakeven point under the current leasing agreement ? What is it under the new commission-based agreement ? Under Current Leasing Agreement : Fixed Costs Break - Even Point = Contribution Margin Determination of the Contribution Margin: Particulars Calculation Amount ($) Sales Price per Page Given 0.32 Less : Printing Costs Given 0.11 Other Variable Costs Given 0.13 Contribution per Page 0.08 th Fixed Costs = $ 1,200 per month Therefore, Break - Even Point = $ 1,200 per Month -= 15,000 Pages $ 0.08 Under Commission - Based Agreement : Commission = $ 20 per 500 Pages which means the Commission = $ 0.04 per Page Under this method, there is no other Fixed Costs. Therefore, Contribution Per Page = $ 0.08 (From Above) - $ 0.04 (Commission) = $ 0.04 Break - Even Point = $0 $ 0.04 = = 0 Pages Which means that the Company makes profit from all the pages it prints.

2. For what range of sales levels will Deckle prefer (a) the fixed lease agreement (b) the commission agreement ? This can be calculated by using the Indifference Option. Let x denote the number of pages the company must sell in order to make the same profit under two methods. So, $ 0.32x - $ 0.11% - $ 0.13x - $ 1,200 = $ 0.32x - $ 0.11x - $ 0.13x - $ 0.04x $ 0.08x - $ 1,200 = $ 0.04x $ 0.04x = $ 1,200 X = $ 1,200 / $ 0.04 X = 30,000 Pages Which means if the company prints 30,000 Pages, the profit earned will be same under any of the two methods. Therefore, If the Bristol Printing Company's Sales Range is : It Prefers : 0 - 30,000 Pages Commission - based Agreement Above 30,000 Pages Fixed Lease Agreement.

3. 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 $ Under Fixed Lease Agreement : Particulars 30,000 Pages 40,000 Pages 50,000 Pages 60,000 Pages 70,000 Pages Sales Revenue 9,600 $ 12,800 $ 16,000 $ 19,200 $ 22,400 Less : Variable Costs Printing Costs 3,300 $ 4,400 $ 5,500 $ 6,600 7,700 Other Variable Costs 3,900 5,200 6,500 $ 7,800 9,100 Contribution 2,400 $ 3,200 4,000 $ 4,800 $ 5,600 Less : Fixed Costs 1,200 $ 1,200 1,200 $ 1,200 $ 1,200 Net Profit 1,200 $ 2,000 $ 2,800 $ 3,600 $ 4,400 Probability 0.20 0.20 0.20 0.20 0.20 Expected Profit 240 $ 400 $ 560 $ 720 $ 880 Value $ 2,800 | $ " A A Under Commission - based Agreement : Particulars 30,000 Pages 40,000 Pages 50,000 Pages 60,000 Pages 70,000 Pages Sales Revenue 9,600 $ 12,800 $ 16,000 $ 19,200 $ 22,400 Less : Variable Costs Printing Costs 3,300 4,400 $ 5,500 $ 6,600 7,700 Other Variable Costs 3,900 5,200 6,500 7,800 9,100 Commission 1,200 1,600 2,000 2,400 2,800 Contribution 1,200 1,600 $ 2,000 $ 2,400 2,800 Less : Fixed Costs Net Profit 1,200 $ 1,600 $ 2,000 $ 2,400 $ 2,800 Probability 0.20 0.20 0.20 0.20 0.20 Expected Profit 240 $ 320 $ 400 $ 480 $ 560 Value $ 2,000 A A - A $ Since, the value of the Agreement under the Fixed Lease Agreement Option is more than the Commission based agreement, it is advisable that Bristol should choose the Fixed Lease Agreement Option.