In early days, the Xerox Corporation faced the following pricing problem for its copying machines (there was hardly any competition then). 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 user would 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 (bundled with paper) if Xerox decided to go with single price (assume that everyone pays the same price and the buyers must pay immediately).
(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 (payable at the end of each year) and a charge per copy made (monitored via the copy meter 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 Xerox's leasing policy? (Assume that each user also uses a 10% discount rate).
(3) Explain in a few words why the leasing plan does better than the single price plan?