Question

Deckle Printing Company currently leases its only copy machine for $ 1,200 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 $ 20 for every 500 pages printed. The company currently charges $ 0.15 per page to its customers. The paper used in printing costs the company $ 0.04 per page and other variable costs, including hourly labor amounting to $ 0.05 per page.

Required
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 Deckle prefer (a) the fixed lease agreement (b) the commission agreement?
3. Do this question only if you have covered the chapter appendix in your class. Deckle estimates that the company is equally likely to sell 20,000, 30,000, 40,000, 50,000, or 60,000 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?



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  • CreatedMay 14, 2014
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