Ink Spot Inc. is a new business located in upstate New York. It prints promotional flyers for local businesses and distributes them at public places or area events. The flyers are either placed on the windshield of cars in parking lots or distributed by hand to people.

Ink Spot’s owner, Dana Everhart, is facing a difficult decision. She could purchase a commercial printer and produce the flyers in house. However, the machinery, costing approximately $20,000, is quite expensive. The printer has an estimated useful life of four years and would be depreciated using the straight-line method with no salvage value. If Dana purchases the printer, she would also have to buy paper and toner for the machine and pay for maintenance or repairs as needed. She estimates that it would cost $0.02 per page to print the flyers herself.

Alternatively, Dana could pay a local printing company $0.05 per copy to print the flyers. She would incur no printing costs other than the $0.05 per page if she chooses this alternative. However, $0.05 per page is considerably more than Dana would have to pay for paper and toner if she owned a commercial printer. Dana plans to charge customers $0.08 per page for each flyer Ink Spot distributes.

Required:

1. Why does Dana need to understand cost behavior? How does it impact Dana and her business?

2. Name at least three costs in addition to the cost of producing the flyers that a business such as Ink Spot would incur, and describe the cost behavior of each one.

3. Considering the decision Dana must make, determine the cost behavior of each alternative.

For any mixed cost, determine the amount of the variable and fixed components as much as possible.

4. Discuss other factors about Ink Spot’s operating environment that Dana should consider when deciding whether to make the flyers or buy them from a local printing company.

5. Discuss factors other than cost that Dana should consider.