Reference no: EM133148835
Question - The Xerox DocuColor iGen3 digital production press is a high volume, on-demand, full-color printer capable of producing up to 6,000 impressions (pages) per hour. It weighs nearly 3 tons, stretches 30 feet long, and holds more than 40 pounds of dry ink. It sells for over $500,000, and its principal market is print shops that produce mail order catalogs (e.g., L.L. Bean). Xerox offers two leasing options for the iGen3. Option A requires a three-year agreement with a monthly lease fee of $10,000 plus $0.01 per impression. Option B (also a three-year agreement) does not include a monthly lease fee but requires a charge of $0.03 per impression.
ColorGrafix is a print shop considering leasing the iGen3 to begin producing customized mailorder catalogs. Besides leasing the iGen3, ColorGrafix estimates that it will have to buy ink for the iGen3 at a cost of $0.02 per impression and hire an operator to run the iGen3 to produce the customized catalogs at a cost of $5,000 per month. ColorGrafix estimates that it can charge $0.08 per impression for customized color catalogs. (Note: the customer provides the paper stock on which the color impressions are printed.)
Required -
a. If ColorGrafix leases the iGen3 and chooses Option A, how many impressions per month will ColorGrafix have to sell and produce to break even?
b. If ColorGrafix leases the iGen3 and chooses Option B, how many impressions per month will ColorGrafix have to sell and produce to break even?
c. Should ColorGrafix choose Option A or Option B? Explain why.
d. ColorGrafix is a fairly new firm (only three years old) and has a substantial amount of debt that was used to help start the company. ColorGrafix has positive net cash flow after servicing the debt, but the owners of ColorGrafix have not felt it wise to withdraw any cash from the business since its inception, except for their salaries. ColorGrafix expects to sell and produce 520,000 impressions per month. Which lease option would you recommend ColorGrafix choose? Explain why.
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