Alternate cost structures, uncertainty, and sensitivity analysis. Stylewise Printing Company currently leases its only copy machine for $1,000 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement Stylewise would pay a commission for its printing at a rate of $10 for every 500 pages printed. The company currently charges $0.15 per page to its customers. The paper used in printing costs the company $.03 per page and other variable costs, including hourly labor amount to $.04 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 Stylewise 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. Stylewise estimates that the company is equally likely to sell 20,000; 40,000; 60,000; 80,000; or 100,000 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 Stylewise choose?