In the early 1960s, the Xerox Corporation faced the following pricing problem for its copying machines.There were two segments of potential users, the large users --whose copying needs were 20,000 copies per year – and the small users -- whose copying needs were 2,000 copies per year. Xerox found that a large userwould be willing to pay as much as $25,800 to buy a Xerox machine provided supplies from Xerox were free of charge over the life of the machine; similarly, a small user would be willing to buy a Xerox machine for $6,700 provided Xerox supplies free supplies. The expected life of a machine is 5 years. There are equal numbers of large and small users. The total number of users is 200.
Xerox's marginal cost of producing each of these machines was estimated to be $1,900. Its marginal cost of paper was $0.03 per sheet. Xerox used a 10% discount rate, i.e., if it generated an income of $1 each year for 5 years, then its present value of that income stream is 1/1.10+1/1.102+...+1/1.105)=$3.79
(1) What should be the selling price of these machines if Xerox decided to go with single price
(2) Xerox wonders if it can make more money leasing the machines instead of selling them. The leasing policy will involve a yearly rental charge and a charge per copy made. 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 Xerox's leasing policy?
(3) Explain in a few words why the leasing plan does better than the single price plan?