Question
Digital 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
Digital 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, Digital 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 $0.08 per page and other variable costs, including hourly labor, amount to $0.10 per page.
Requirements:
1. | What is the company's breakeven point under the current leasing agreement? What is it under the new commission-based agreement? |
2. | For what range of sales levels will Digital prefer (a) the fixed lease agreement and (b) the commission agreement? |
3. | Digital estimates that the company is equally likely to sell 25,000, 35,000, 45,000, 55,000, or 65,000 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 Digital choose? |
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