Question

Blueline 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, Blueline would pay a commission for its printing at a rate of $25 for every 500 pages printed. The company currently charges $0.32 per page to its customers. The paper used in printing costs the company $0.02 per page and other variable costs, including hourly labor, amount to $0.06 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.) = Breakeven number of units * Requirements - X 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 Blueline prefer (a) the fixed lease agreement and (b) the commission agreement? Blueline 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 Blueline choose? Print Done

Answer 1

Break even point = Fixed costs/(Selling price per unit – Variable costs per unit)

= 1500/(0.32-0.02-0.06)

= 6250 pages

New commission based = 0, since no fixed cost

2.Corrover point = Difference in fixed cost/Difference in variable cost

= 1500/(0.05-0) = 30,000 pages

The fixed lease agreement will be preferred for sales over 30000 pages

Upto 30000 pages – commission based

3.Profit

Pages	Fixed lease	Commission based
20000	3300	3800
30000	5700	5700
40000	8100	7600
50000	10500	9500
60000	12900	11400
Total	40500	38000
Average	8100	7600

Expected Value of fixed lease = $8100

Commission based = $7600

Fixed lease should be chosen