You are the manager of a 24-hour copy shop that is closed on Sundays. You lease

Question

You are the manager of a 24-hour copy shop that is closed on Sundays. You lease a building for $2,000 per month and hire three employees who each work eight-hour shifts at a wage of $10.00 per hour. The markets for labor and office space are tight in your area. To acquire the lease and hire workers, you signed contracts requiring you to give 12 months advance notice before abandoning your lease or laying off workers (if you fail to comply, the contracts force you to fully compensate your landlord and workers for the income they otherwise would have earned over the 12-month period). Paper costs you $.02 per sheet. You currently sell 500,000 color copies per year at a price of $.10 per copy and 1,000,000 black and white copies per year at a price of $.05 per copy. Because of your high volume, each of your two copiers has a useful life of only one year. You just received a call from an employee who informs you that your color copier just broke down. The good news is that your black and white copier is brand-new; the bad news is that a new color copier will cost $30,000. Should you purchase a new color copier? Assume that customers who want color copies are unwilling to substitute black and white copies.

Explanation / Answer

Your cost of labor and lease payments are irrelevant to this decision, as the contract requires you to make these payments over the next year regardless of whether you acquire a new color copier.
The incremental cost of the copier is $30,000. If you acquire a new copier, you will earn 8 cents on each copy you sell (ten cents less paper costs of two cents), so your incremental revenues from purchasing a new copier are ($.08)(500,000) = $40,000.
Since incremental revenues exceed incremental costs, you should acquire a new color copier.
You earn $10,000 more by purchasing a new copier than by not purchasing it.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.