Question

Flexo Printing Company currently leases its only copy machine for $1,400 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement Flexo would pay a commission for its printing at a rate of $25 for every 500 pages printed. The company currently charges $0.25 per page to its customers. The paper used in printing costs the company $0.04 per page and other variable costs, including hourly labor, amount to $0.05 per page Read the requirements. The indifference point = sales volume at which the income from alternative 1 equals the income from alternative 2. 2 Now calculate the indifference point. (Round to the nearest whole number.) The indifference point is at 28,000 units. Flexo would prefer the fixed lease agreement at sales more than the indifference point The commission based agreement would be preferred at O units up to the indifference point Requirement 3. Flexo estimates that the company is equally likely to sell 17.500, 27,500, 37.500, 47,500, or 57,500 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 Flexo choose? Begin with the fixed leasing agreement. (Use parentheses or a minus sign for losses.) Requirements 1. 1. Fixed leasing agreement Expected Sales level Profit (Loss) Profit(Loss) 17,500 $ 27,500 $ 3,000 37,500 $ 4,600 47,500 $ 6.200 1,400 2. 3. 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 Flexo prefer (a) the fixed lease agreement and (b) the commission agreement? Flexo estimates that the company is equally likely to sell 17,500, 27,500, 37,500, 47,500, or 57,500 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 Flexo choose? 57,500 $ 7,800 Total expected profit/(loss) Print Done Enter any number in the edit fields and then click Check Answer. ? parts 2 remaining 2 Clear All Final Check

Answer 1

Pages	Fixed lease	Commission based
17500	1400	1925
27500	3000	3025
37500	4600	4125
47500	6200	5225
57500	7800	6325
Total	23000	20625
Average	4600	4125

A B с 1 Pages Fixed lease Commission based 2 17500 =A2*0.16-1400 =A2*(0.16-0.05) 3 27500 =A3*0.16-1400 =A3*(0.16-0.05) 4 37500 =A4*0.16-1400 =A4*(0.16-0.05) 5 47500 =A5*0.16-1400 |=A5*(0.16-0.05) 6 57500 =A6*0.16-1400 =A6*(0.16-0.05) 7 Total =SUM(B2:B6) I=SUM(C2:06) 8 Average =B7/5 =C7/5

Hence, fixed lease must be chosen as its average is higher