a) OPOKONO Bhd. Produces water pump components which sell for RM120. OPOKONOs fixed costs are RM220,000; 6,000 components are produced and sold each year; EBIT is currently RM65,000; and OPOKONOs assets (all equity financed) are RM500,000.

OPOKONO estimates that it can change its production process, adding RM400,000 to investment and RM50,000 to fixed operating costs.

This change will (1) reduce variable costs per unit by RM10, and (2) increase output by 2,000 units, but (3) the sales price on all units will have to be lowered to RM115 to permit sales of the additional output.

OPOKONO has tax loss carry-forwards that affect its tax rate to be zero. OPOKONO uses no debt, and its average cost of capital is 10%.

1. Should OPOKONO make the change?

   (8 marks)

2. Would OPOKONOs degree of operating leverage (DOL) increase or decrease if it made the change? What happen to its breakeven point?

b)

(4 marks)