Chapter A, Problem 6P

A news clipping service is considering modernization. Rather than manually clipping and photocopying articles of interest and mailing them to its clients, employees electronically input stories from most widely circulated publications into a database. Each new issue is searched for key words, such as a client’s company name, competitors’ names, type of business, and the company’s products, services, and officers. When matches occur, affected clients are instantly notified via an online network. If the story is of interest, it is electronically transmitted, so the client often has the story and can prepare comments for follow-up inter-views before the publication hits the street. The manual process has fixed costs of $400,000 per year and variable costs of $6.20 per clipping mailed. The price charged the client is $8.00 per clipping. The computerized process has fixed costs of $1,300,000 per year and variable costs of $2.25 per story electronically transmitted to the client.

1. If the same price is charged for either process, what is the annual volume beyond which the automated process is more attractive?
2. The present volume of business is 225,000 clippings per year. Many of the clippings sent with the current process are not of interest to the client or are multiple copies of the same story appearing in several publications. The news clipping service believes that by improving service and by lowering the price to $4.00 per story, modernization will increase volume to 900,000 stories transmitted per year. Should the clipping service modernize?
3. If the forecasted increase in business is too optimistic, at what volume will the new process (with the $4.00 price) break even?