Chapter 15, Problem 15.14AE

Sustainability and cost behavior (Learning Objective 1)

Lunar Entertainment is a provider of cable, Internet, and on-demand video services. Lunar currently sends monthly bills to its customers via the postal service. Because of a concern for the environment and recent increases in postal rates, Lunar management is considering offering an option to its customers for paperless billing. In addition to saving printing, paper, and postal costs, paperless billing will save energy and water (through reduced paper needs, waste disposal, and transportation needs). While Lunar would like to switch to 100% paperless billing, many of its customers are not comfortable with paperless billing or may not have online access, so the paper billing option will remain regardless of whether or not Lunar adopts a paperless billing system.

The cost of the paperless billing system would be $48,800 per quarter with no variable costs since the costs of the system are the salaries of the clerks and the cost of leasing the computer system. The paperless billing system being proposed would be able to handle up to 900,000 bills per quarter (more than 900,000 bills per quarter would require a different computer system and is outside the scope of the current situation at Lunar).

Lunar has gathered its cost data for the past year by quarter for paper, toner cartridges, printer maintenance costs, and postage costs for the billing department. The cost data are as follows:

Requirements

1. 1. Calculate the variable cost per bill mailed under the current paper-based billing system. Use the high-low method.
2. 2. Assume that the company projects that it will have a total of 640,000 bills to mail in the upcoming quarter. If enough customers choose the paperless billing option so that 15% of the mailings can be converted to paperless, how much would the company save from the paperless billing system (be sure to consider the cost of the paperless billing system)?
3. 3. What if only 5% of the mailings are converted to the paperless option (assume a total of 640,000 bills)? Should the company still offer the paperless billing system? Explain your rationale.