Pack-and-Go, a new competitor to FedEx and UPS, does intra city package deliveries in seven major metropolitan areas. The performance of Pack-and-Go is measured by management as: (1) delivery time (relative to budgeted delivery time), (2) on-time delivery rates (defined as agreed-upon delivery date/time plus or minus a specified cushion), (3) percentage of lost or damaged deliveries. In response to competitive pressures Pack-and-Go is evaluating an investment in new technology that would improve customer service and delivery quality, particularly in terms of items (2) and (3) above. The annual cost of the new technology is expected to be $80,000. You have gathered the following information regarding delivery performance under both existing operations and after implementing the new technology:

Based on a recent marketing study commissioned by Pack-and-Go, the company estimates that each percentage point increase in the on-time performance rate would lead to an annual revenue increase of $10,000. The average contribution margin ratio for packages delivered by Pack-and-Go is estimated as 40%.
Required
1. What should Pack-and-Go do: from a financial perspective, should the company invest in the new technology?
2. Based on its own data collected over all of the operating areas served by Pack-and-Go, the company is fairly confident about the reduction in costs associated with lost or damaged packages. However, because of uncertainties in terms of pricing in the markets in which Pack-and-Go operates, it is less sure about the predicted increase in revenues associated with the implementation of the new technology. What is the breakeven increase in annual revenue that would justify the investment in the new technology?

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Decision Alternative After Implementing New Technology Current Item On-time delivery rate Variable cost per package lost or damaged Allocated fixed cost per package lost or damaged Annual no. of packages lost or damaged System 80% $30 $10 300 95% $30 $10 100