Question

The Print Shop provides copying services to the general public. The Print Shop has equipment which is capable of making 1,800 copies per hour. The practical capacity of the equipment is 7 hours per day due to set up time and time to re-supply paper and toner. Customers expect quick service. If copies cannot be made within an hour, the customer will take their job elsewhere. The Print Shop has an excellent location and as such the business has a fairly steady demand of 10,000 copies per day. The shop charges 25 cents a copy and has a total variable cost of 22 cents per copy. Required: (a) At 8 a.m. one morning a customer brings in 5,000 pages to be copied. The customer has requested that the copies be available by closing time. For this one-time order, the customer will only pay 24 cents per copy. Prepare a financial analysis to determine whether the order should be accepted. (3 marks) (b) Calculate the largest order from this customer that the shop could accept at 24 cents per copy and still earn a normal day’s income.

Answer 1

a) The financial analysis determining the acceptance of the special order is as follows:

Data and Financial Analysis:

Capacity of photocopier per hour = 1,800 copies

Practical capacity of equipment = 7 hours

Total copies in a day = 12,600 (1,800 x 7)

Steady demand per day = 10,000

Variable cost per copy = $0.22

Service price per copy = $0.25

Profit per copy = $0.03 ($0.25 - $0.22)

Normal profit based on steady demand of 10,000 = $300 ($0.03 x 10,000)

Profit based on maximum capacity of 12,600 = $378 ($0.03 x 12,600)

Price per copy for the special customer = $0.24

Profit per copy based on special price of $0.24 = $0.02 ($0.24 - $0.22)

Profit from special customer with 5,000 pages = $100 (5,000 x $0.02)

Profit from other probable customers = $228 (7,600 x $0.03)

Lost profit for accepting special order based on maximum capacity = $50 ($378 - $228 - $100)

Lost profit if order is not accepted and demand is only 10,000 copies = $78 ($378 - $300)

• Therefore, the special order at $0.24 should be accepted.

b) The largest order from customer that the shop could accept = 5,000 + $50/$0.02

= 5,000 + 2,500

= 7,500 copies

Thus, if the customer orders 7,500 copies to be made, the shop can still realize a maximum profit of $378 by accepting orders for additional 5,100 (12,600 - $7,500) copies from others.

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