Printing Company currently leases its only copy machine for

$1,300

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

$20

for every 500 pages printed. The company currently charges

$0.30

per page to its customers. The paper used in printing costs the company

$ 0.07

per page and other variable costs, including hourly labor, amount to

$ 0.10

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
$1,300	/	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)

Enter any number in the edit fields and then click Check Answer.

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