Alternate cost structures, uncertainty, and sensitivity analysis. Corporate Printing Company currently leases its only copy machine for $1,500 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement, Corporate would pay a commission for its printing at a rate of $20 for every 500 pages printed. The company currently charges $0.20 per page to its customers. The paper used in printing costs the company $0.05 per page and other variable costs, including hourly labor, amount to $0.10 per page.Required:What is the company’s breakeven point under the current leasing agreement? What is it under the new commission-based agreement?For what range of sales levels will Corporate prefer (a) the fixed lease agreement and (b) the commission agreement?Do this question only if you have covered the chapter appendix in your class. Corporate 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 Corporate choose?

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Asked Dec 21, 2019
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Alternate cost structures, uncertainty, and sensitivity analysis. Corporate Printing Company currently leases its only copy machine for $1,500 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement, Corporate would pay a commission for its printing at a rate of $20 for every 500 pages printed. The company currently charges $0.20 per page to its customers. The paper used in printing costs the company $0.05 per page and other variable costs, including hourly labor, amount to $0.10 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 Corporate prefer (a) the fixed lease agreement and (b) the commission agreement?
  3. Do this question only if you have covered the chapter appendix in your class. Corporate 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 Corporate choose?
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Old leasing agreement Given, Selling price per unit is 0.20. Variable cost per unit is $0.15( S0.05 + S0.10) Fixed costs are 1,500. Formula to calculate break-even units: Fixed cost Break-even units Contribution margin per unit $1, 500 $0.20 -0.15 $1,500 S0.05 Break even point = 30,000 units Therefore, the company's breakeven point under the current leasing agreement is 30,000 units. New agreement Given, Selling price per unit is 0.20. S20 Variable cost per unit is S0.19 S0.05 + S0.10+ 500 Formula to calculate break-even units: Fixed cost Break-even units =- Contribution margin per unit SO S0.20 - SO 19 So Break-even point $0.01 = 0 units Therefore, the company's breakeven point under the commission agreement is 0 units.

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Given, Contribution margin per unit from lease agreement is 0.05. Contribution margin per unit from commission agreement is 0.01. Fixed cost is $1,500. Formula to calculate sales quantity when profit for lease agreement is higher than profit for commission agreement: Profit for lease agreement>Profit from commi ssi on agreement Substitute = 0.05 x Sales quantity - $1,500 for profit for = 0.01x Sales quantity for profit for commission agreement, lease and agreement 0.05 x Sales quantity – $1, 500 > 0.01 x Sales quantity 0.04 x Sales quantity>1,500 Sales quantity>37,500 Working Note: Calculation of Profit from fixed lease agreement: Profit = (Contribution margin per unit x Sales quantity)- Fixed cost cost =0.05 x Sales quantity -$1, 500 Calculation of Profit from commission agreement: Profit = Contribution margin per unit x Sales quantity = 0.01x Sales quantity Conclusion: Hence, for the sales quantity higher than 37,500 pages, original fixed lease agreement will be preferred. And for quantity less than 37,500 pages, commission agreement will be preferred.

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Given below is the statement for the computation of expected profits for commission agreements and lease agreements for various sales quantities: Sales quantity Profit commission (S) 0.01x Sales quantity Profit fixed lease (S) 0.05 x Sales quantity -$1, 500 20,000 200 (500,) 30.000 300 500 1,000 1,500 500 40,000 50,000 60,000 Expected value 400 500 600 400 Table (1) Formula to calculate expected value for commission agreement: Profit from commission agreem ent at various sales levels Expected value Number of sales levels Substitute $200 for 20,000 units, S300 for 30,000 units, $400 for 40,000 units, S500 for 50,000 units and S600 for 60,000 units, $200 + S300 +S400 +$500 + S600 Expected value = $2,000 =$400 Formula to calculate expected value for fixed lease agreement: Profit from fixed lease agreement at various sales levels Number of sales levels Expected value Substitute (S500) for 20,000 units, S0 for 30,000 units, $500 for 40.000 units, $1,000 for 50,000 units and S1,500 for 60,000 units, (S500) + S0 + S500 +$1,000 + $1,500 Expected value = $2,500 = $500

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