Printing Company currently leases its only copy machine for $ 1 comma 300$1,300
ID: 2330103 • Letter: P
Question
Printing Company currently leases its only copy machine for
$ 1 comma 300$1,300
a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the newagreement,
FlexoFlexo
would pay a commission for its printing at a rate of
$ 20$20
for every 500 pages printed. The company currently charges
$0.300.30
per page to its customers. The paper used in printing costs the company
$ 0.07$0.07
per page and other variable costs, including hourly labor, amount to
$ 0.10$0.10
per page.Read the requirements
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.
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
$1,300
/
0.13
=
10,000
What is it under the new commission-based agreement? (Enter a "0" for any zero balances.)
The company's breakeven point under the new commission-based agreement is
0
units.
Requirement 2. For what range of sales levels will
FlexoFlexo
prefer (a) the fixed lease agreement and (b) the commission agreement?In order to determine the range of sales levels
FlexoFlexo
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
32,500
units.
FlexoFlexo
would prefer the fixed lease agreement at
sales more than the indifference point
.The commission based agreement would be preferred at
0 units up to the indifference point
.Requirement 3.
FlexoFlexo
estimates that the company is equally likely to sell
22 comma 00022,000,
32 comma 00032,000,
42 comma 00042,000,
52 comma 00052,000,
or
62 comma 00062,000
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
FlexoFlexo
choose?
Begin with the fixed leasing agreement. (Use parentheses or a minus sign for losses.)
Fixed leasing agreement
Expected
Sales level
Profit/(Loss)
Profit/(Loss)
22,000
$1,560
$312
32,000
$2,860
$572
42,000
$4,160
$832
52,000
$5,460
$1,092
62,000
$6,760
$1,352
Total expected profit/(loss)
$4,160
Next, calculate the expected profit at each sales level under the commission based agreement.
Commission-based agreement
Expected
Sales level
Profit/(Loss)
Profit/(Loss)
22,000
32,000
42,000
52,000
62,000
Total expected profit/(loss)
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Fixed costs
/
Contribution margin per unit
=
Breakeven number of units
$1,300
/
0.13
=
10,000
Explanation / Answer
REQUIREMENT 1 – COMPANY’S BREAK EVEN POINT
FORMULA
BREAK EVEN POINT (In Units ) = FIXED COST / CONTRIBUTION PER UNIT
Company’s Break Even Point under the current leasing agreement
Fixed Cost
=Machine Lease Payable
= 1300 $ Per Month
Contribution Per Unit
= Sale Price Per Unit – Variable Cost Per Unit
= 0.30 $ - (0.10 $ + 0.07 $ )
= 0.13 $
BREAK EVEN POINT
= 1300 $ / 0.13 $
= 10000 UNITS PER MONTH
(This means Comapany will earn NO PROFIT NO LOSS if it sells 10000 Units per Month )
Company’s Break Even Point under the new commission-based agreement
Fixed Cost
= 0 $ Per Month
Contribution Per Unit
= Sale Price Per Unit – Variable Cost Per Unit
= 0.30 $ - (0.10 $ + 0.07 $ + 0.04 $)
= 0.09 $
BREAK EVEN POINT
= 0 $ / 0.09 $
= 0 UNITS PER MONTH
(This means Comapany will earn PROFIT even if sells a single unit)
REQUIREMENT 2 - INDIFFRENCE POINT
The Point at which Both the Option under Comparision will be Equal
= Additional Fixed Cost / Additional Contribution
Additional Fixed Cost = 1300 $ - 0 $ = 1300 $
Additional Contribution = 0.13 $ - 0.09 $ = 0.04 $
Indifference Point = 1300 $ / 0.04 $
= 32500 Units
This Means At Sales Level of 32500 Units per Month Flexo Company will Make Same Profit as Lease Rent for the machine in Both the Option will be Same.
Ananlysis -
1. Profit Above 32500 Units ( For Example at 40000 Units )
UNDER FIX LEASE OPTION
TOTAL CONTRIBUTION = 40000 X 0.13 $ / Unit = 5200 $
PROFIT = 5200 $ - 1300 $ = 3900 $
UNDER PER UNIT LEASE OPTION
TOTAL CONTRIBUTION = 40000 X 0.09 $ / Unit = 3600 $
PROFIT = 3600 $ - 0 $ = 3600 $
THIS MEANS ABOVE INDIFFERENCE POINT FIX LEASE OPTION IS PROFITABLE FOR THE COMPANY
2. Profit Below 32500 Units ( For Example at 25000 Units )
UNDER FIX LEASE OPTION
TOTAL CONTRIBUTION = 25000 X 0.13 $ / Unit = 3250 $
PROFIT = 3250 $ - 1300 $ = 1950 $
UNDER PER UNIT LEASE OPTION
TOTAL CONTRIBUTION = 25000 X 0.09 $ / Unit = 2250 $
PROFIT = 2250 $ - 0 $ = 2250 $
THIS MEANS BELOW INDIFFERENCE POINT PER UNIT LEASE OPTION IS PROFITABLE FOR THE COMPANY.
REQUIREMENT 3 - EXPECTED EARNING
UNDER FIX LEASING OPTION
AT 22000 UNITS = ( 22000 X 0.13 ) – 1300 = 1560 $
AT 32000 UNITS = ( 32000 X 0.13 ) – 1300 = 2860 $
AT 42000 UNITS = ( 42000 X 0.13 ) – 1300 = 4160 $
AT 52000 UNITS = ( 52000 X 0.13 ) – 1300 = 5460 $
AT 62000 UNITS = ( 62000 X 0.13 ) – 1300 = 6760 $
TOTAL EXPECTED PROFIT
=( 1560 + 2860 + 4160 + 5460 +6760 ) / 5
= 20800 / 5
= 4160 $
UNDER PER UNIT LEASING OPTION
AT 22000 UNITS = ( 22000 X 0.09 ) – 0 = 1980 $
AT 32000 UNITS = ( 32000 X 0.09 ) – 0 = 2880 $
AT 42000 UNITS = ( 42000 X 0.09 ) – 0 = 3780 $
AT 52000 UNITS = ( 52000 X 0.09 ) – 0 = 4680 $
AT 62000 UNITS = ( 62000 X 0.09 ) – 0 = 5580 $
TOTAL EXPECTED PROFIT
=( 1980 + 2880 + 3780 + 4680 +5580 ) / 5
= 18900 / 5
= 3780 $
CONCLUSION -
AT THESE EXPECTED SALES LEVEL OPTION FOR FIX LEASING OPTION WILL BE MORE PROFITABLE FOR THE COMPANY, AS HAVING MORE EXPECTED PROFIT OF 4160 $ AS COMPARED TO 3780 $ UNDER PER UNIT LEASING OPTION.
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