Question

I need some help answering these three questions. I've been stuck on it for a few hours now.

Deckle Printing Company currently leases its only copy machine for $1,800 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement, Deckle would pay a commission for its printing at a rate of $25 for every 500 pages printed. The company currently charges $0.23 per page to its customers. The paper used in printing costs the company $0.05 er page and other variable costs, including hourly labor, amount to $0.12 per page. Read the requirements. 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 $ 1,800 0.06 30,000 = What is it under the new commission-based agreement? (Enter a "0" for any zero balances.) 0 units The company's breakeven point under the new commission-based agreement is Requirement 2. For what range of sales levels will Deckle prefer (a) the fixed lease agreement and (b) the commission agreement? n order to determine the range of sales levels Deckle 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 units x Requirements 1. 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 Deckle prefer (a) the fixed lease agreement and (b) the commission agreement? Deckle estimates that the company is equally likely to sell 26,000, 36,000, 46,000, 56,000, or 66,000 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 Deckle choose? Print Done

Answer 1

Break even point = Fixed costs/ contribution margin per units

where,

Current leasing agreement

Fixed cost = 1800

contribution margin per units = Selling price per unit – Variable costs per unit

contribution margin per units = 0.23 - 0.05 - 0.12 = 0.06

Break even point = 1800 / 0.06 = 30000 pages

New commission based = 0

since no fixed cost

2.Indifferent point = Difference in fixed cost / Difference in variable cost

= 1800 / (0.05-0) = 36000 pages

The fixed lease agreement will be preferred for sales over 36000 pages

Up to 36000 pages – commission based is preferred

3.Profit

Pages	Fixed lease	Commission based
26000	-240	260
36000	360	360
46000	960	460
56000	1560	560
66000	2160	660
Total	4800	2300
Average	4800/5 =960	2300/5 =460

Commission per pages = 25 / 500 = 0.05

26000 pages = 0.06* 26000 - 1800 = -240 - under lease

          = 0.06 * 26000 - (0.05 * 26000 ) = 260 - under commission

Expected Value of fixed lease = $960

Commission based = $460

Fixed lease should be chosen