Question

The College of Business is deciding between two photocopier options. The first is to lease a high-end machine for $8,400/year. The lease is all-inclusive so the only additional costs are the cost of paper, which is $0.01/sheet. The other option is to purchase a machine. The cost is $5,000 and the per sheet cost increases (toner, maintenance) to $0.02.
Which option is preferred if the annual copy volume is expected to be 270,000? What if the copy volume is reduced to 240,000? At what volume is the College indifferent between the two options?

Answer 1

Answer:

Instructions are listed below.

Explanation:

Giving the following information:

The first is to lease a high-end machine for $8,400/year.The only additional costs are the cost of paper, which is $0.01/sheet.

The other option is to purchase a machine. The cost is $5,000 and the per sheet cost increases (toner, maintenance) to $0.02.

First, we need to determine the total cost formula for each option:

Option 1:

Total cost= 8,400 + 0.01x

Option 2:

Total cost= 5,000 + 0.02x

A) Volume= 270,000

Option 1:

Total cost= 8,400 + 0.01*270,000= $11,100

Option 2:

Total cost= 5,000 + 0.02*270,000= $10,400

Option 2 is the cheapest.

B) Volume= 240,000

Option 1:

Total cost= 8,400 + 0.01*240,000= $10,800

Option 2:

Total cost= 5,000 + 0.02*240,000= $9,800

Option 2 is the cheapest.

C) To determine the indifference point, we need to isolate X:

8,400 + 0.01x= 5,000 + 0.02x

3,400= 0.01x

340,000=x

The indifference point is 340,000 paper sheets.