Author Question: When a company pays salaries to an assistant, a. assets increase. b. expenses increase. c. ... (Read 103 times)

BRWH · **on:** Jul 6, 2018

When a company pays salaries to an assistant,
a. assets increase.
b. expenses increase.
c. liabilities increase.
d. owner's equity increase.

Question 2

Alternative cost structures, uncertainty, and sensitivity analysis.

Deckle Printing Company currently leases its only copy machine for 1,200 a month. The company is considering replacing this leasing agreement with a new contract that is entirely commission based. Under the new agreement, Deckle would pay a commission for its printing at a rate of 20 for every 500 pages printed. The company currently charges 0.15 per page to its customers. The paper used in printing costs the company 0.04 per page and other variable costs, including hourly labor amounting to 0.05 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 Deckle 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. Deckle 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 Deckle choose?

ebe · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

B

Answer to Question 2

1. Contribution margin per
page assuming current
fixed leasing agreement = 0.15 0.04 0.05 = 0.06 per page
Fixed costs = 1,200
Breakeven point =

Contribution margin per page
assuming 20 per 500 page
commission agreement = 0.15 0.04a 0.04 .05 = 0.02 per page

Fixed costs = 0
Breakeven point =
(i.e., Deckle makes a profit no matter how few pages it sells)
a20 500 pages = 0.04 per page

2. Let denote the number of pages Deckle must sell for it to be indifferent between the fixed leasing agreement and commission based agreement.
To calculate we solve the following equation.
0.15 0.04 0.05 1,200 = 0.15 0.04 0.04 .05
0.06 1,200 = 0.02
0.04 = 1,200
= 1,200 0.04 = 30,000 pages
For sales between 0 to 30,000 pages, Deckle prefers the commission-based agreement because in this range, 0.02 > 0.06 1,200. For sales greater than 30,000 pages, Deckle prefers the fixed leasing agreement because in this range, 0.06 1,200 > .02 .

3. Fixed leasing agreement
Pages Sold
(1) Revenue
(2) Variable
Costs
(3) Fixed
Costs
(4) Operating
Income
(Loss)
(5) = (2) (3) (4) Probability
(6) Expected
Operating
Income
(7)=(5) (6)

20,000 20,000 .15= 3,000 20,000 .09=1,800 1,200 0 0.20 0
30,000 30,000 .15= 4,500 30,000 .09=2,700 1,200 600 0.20 120
40,000 40,000 .15= 6,000 40,000 .09=3,600 1,200 1,200 0.20 240
40,000 50,000 .15= 7,500 50,000 .09=4,500 1,200 1,800 0.20 360
60,000 60,000 .15= 9,000
60,000 .09=5,400 1,200 2,400 0.20 480
Expected value of fixed leasing agreement 1,200
Commission-based leasing agreement:

Pages Sold
(1) Revenue
(2) Variable
Costs
(3) Operating Income
(4) = (2) (3) Probability
(5) Expected
Operating Income
(6)=(4) (5)

20,000 20,000 .15= 3,000
20,000 .13=2,600 400 0.20 80
30,000 30,000 .15= 4,500
30,000 .13=3,900 600 0.20 120
40,000 40,000 .15= 6,000
40,000 .13=5,200 800 0.20 160
50,000 50,000 .15= 7,500
50,000 .13=6,500 1,000 0.20 200
60,000 60,000 .15= 9,000
60,000 .13=7,800 1,200 0.20 240
Expected value of commission based agreement 800

Deckle should choose the fixed cost leasing agreement because the expected value is higher than under the commission-based leasing agreement. The range of sales is high enough to make the fixed leasing agreement more attractive.