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    PRCG - Problem - Statement 2

    Uploaded by

    ashwin bansal
    The document analyzes different pricing options for selling or leasing photocopy machines. It recommends leasing the machines with a yearly rental fee of $501 and per-copy fee of $0.11. Leasing is better than selling because it adds more value for small users by lowering lifetime costs and builds in cash flow benefits for large users while still meeting willingness to pay. However, if the proportion of small to large users increased from 1:1 to 2:1, leasing may not be as advantageous as selling since large users subsidize small users and total revenues would decline with fewer large users.

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    PRCG - Problem - Statement 2

    Uploaded by

    ashwin bansal
    14 views2 pages
    The document analyzes different pricing options for selling or leasing photocopy machines. It recommends leasing the machines with a yearly rental fee of $501 and per-copy fee of $0.11. Leasing is better than selling because it adds more value for small users by lowering lifetime costs and builds in cash flow benefits for large users while still meeting willingness to pay. However, if the proportion of small to large users increased from 1:1 to 2:1, leasing may not be as advantageous as selling since large users subsidize small users and total revenues would decline with fewer large users.

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    PRCG_Problem_Statement 2

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    The document analyzes different pricing options for selling or leasing photocopy machines. It recommends leasing the machines with a yearly rental fee of $501 and per-copy fee of $0.11. Leasing is better than selling because it adds more value for small users by lowering lifetime costs and builds in cash flow benefits for large users while still meeting willingness to pay. However, if the proportion of small to large users increased from 1:1 to 2:1, leasing may not be as advantageous as selling since large users subsidize small users and total revenues would decline with fewer large users.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views2 pages

    PRCG - Problem - Statement 2

    Uploaded by

    ashwin bansal
    The document analyzes different pricing options for selling or leasing photocopy machines. It recommends leasing the machines with a yearly rental fee of $501 and per-copy fee of $0.11. Leasing is better than selling because it adds more value for small users by lowering lifetime costs and builds in cash flow benefits for large users while still meeting willingness to pay. However, if the proportion of small to large users increased from 1:1 to 2:1, leasing may not be as advantageous as selling since large users subsidize small users and total revenues would decline with fewer large users.

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    © All Rights Reserved
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    You are on page 1of 2

    Pricing Problem Statement 2

    Name – Ashwin Bansal

    PGID – 62210352

    Section I

    Q1. What should be the selling price of these machines (bundled with supplies)? (Only one price can
    be charged, i.e., everyone who buys must pay the same price, and the buyer must pay immediately.)

    Particulars Large users Small users


    Copies/year 20,000 2,000
    WTP 25,800 6,700
    Supplies cost@0.03/copy 600 60
    PV of cost 2,274 227
    Marginal Cost of machine 1,900 1,900
    Total cost of selling machine + supplies 4,174 2,127

    Through the above computation we observe that Xeroks is being able to cater to both large and
    small users below their WTP. Hence, a price of $6500 would be fair where we’re also sharing some
    saving with the users as well.

    The above price does not take into consideration the distribution and other costs that the company
    might incur.

    Q2. Xeroks wonders if it can make more money leasing the machines instead of selling them. The
    leasing policy will involve a yearly rental charge (payable at the end of each year) and a charge per
    copy made (monitored via a metering device on the machines) cumulated over each year and
    payable at the end of the year. Only one leasing plan - i.e., a single rental charge and a single per
    copy charge - is being contemplated. What should be Xeroks’ leasing policy? (Assume that each user
    also uses a 10% discount rate.)

    Assuming that Xeroks would like to earn the same revenue in present value terms in a leasing
    contract that it earns in a selling contract, the present value of the total leasing rentals including
    charges should on average be $6500 for both large users and small users. Using this approach, we
    have computed the following price for the leasing contract -:

    Sl.No. Particulars Computation Amount


    (a) Yearly cost for rentals 1900/3.79 501
    Total yearly revenue Xeroks would like to
    (b) earn 6500/3.79 1,715
    (c) Yearly cost of supplies (b)-(a) 1,214
    (d) Average Copies / year (20000+2000)/2 11,000
    (e) Per Copy Charges (c)/(d) 0.11

    Hence, our yearly rental charge would be $501/year and per copy charge would be $0.11 copy.
    Xeroks can make more money by helping the users with regards to their cash flows.
    Q3. Which of the above two plans works better? Why?

    The leasing model is better than the selling model because -:

     Leasing adds more value to small users by being able to personalise our product for them.
    They are paying much lower lifetime costs for the printer. They are paying around $2800 in
    the leasing model against $6500 before.
     For the large customer, we’re able to build in cash flow advantages in our solution and still
    deliver our services within their willingness to pay.
     These benefits would also allow the company to increase their market share and attract
    further customers.

    Q4. Would the advantage of leasing over selling increase or decrease if the relative proportion of
    small to large users increased from 1:1 to 2:1? Why?

    If the proportion of small to large users increased from 1:1 to 2:1, our overall revenues would
    decline. Hence, leasing would not be advantageous compared to selling in this case. This is because
    in the leasing model the large users are subsidising our small users. Hence, if there is a decline in
    percentage of large users, we’ll see an overall decline in revenues. This assumes that the prices that
    we are charging have remained same as before.

    01:01 01:02
    Large Large
    Particulars users Small users users Small users
    Copies/year 20,000 2,000 20,000 2,000
    Number of users(assumed) 150 150 100 200
    PV of Machine Rental 1,900 1,900 1,900 1,900
    PV of Supplies
    charges@0.11/copy 8,364 836 8,364 836
    Rental per machine 10,264 2,736 10,264 2,736
    Total Rental 15,39,545 4,10,455 10,26,364 5,47,273
    Total revenue 19,50,000 15,73,636

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