Question

Crossover 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, Crossover would pay a commission for its printing at a rate of $10 for every 500 pages printed. The company currently charges 0.21 per page to its customers. The paper used in printing costs the company $0.04 per page and other variable​ costs, including hourly​ labor, amount to $0.12 per page.

* 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 Crossover prefer (a) the fixed lease agreement and (b) the commission agreement? Crossover estimates that the company is equally likely to sell 22,000, 32,000, 42,000, 52,000, or 62,000 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 Crossover choose? Print Done

Answer 1

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

= 1300/(0.21-0.04-0.12)

= 26000 pages

New commission based = 0

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

= 1300/(0.02-0) = 65000 pages

The fixed lease agreement will be preferred for sales over 65000 pages

Upto 65000 pages – commission based

3.Profit

Pages	Fixed lease	Commission based
22000	-200	660
32000	300	960
42000	800	1260
52000	1300	1560
62000	1800	1860

Commission based should be chosen