AGL Electronics Inc.

AGL Electronics Inc. manufactures DX drones for niche clients in the entertainment industry. The drones it currently builds have basic features with a few add-ons. They sell in a range of $9,000 - $11,000. It is now 2 months after the year-end, and the following information for the year ended 20X3 for AGL has just been released:

Units sold in the year: 5,000 with average selling price of $10,000 each.

Sales $50,000,000

Variable costs $12,000,000

Contribution margin $38,000,000

Fixed costs

Manufacturing $18,000,000

Selling & Administration $ 4,000,000

Total Fixed Costs $22,000,000

Income before taxes $16,000,000

Proposed expansion:

In its present facilities, AGL has the capacity to produce 5,500 drones a year. AGL wants to improve the design of its current drone, DX, and develop various lines of drones for different industries. To expand, AGL is considering leasing a new facility and machinery from January 20X5, which will cost an additional $14,000,000 per year in leasing expenses. This expansion would double AGLs current capacity. Due to the efficiency of the new machinery, the variable costs are expected to decrease by $500 per drone. Current fixed manufacturing and selling & administrative costs are expected to increase by another $2,000,000 to support the expansion. The new designs would result in the average selling price per drone to rise by 15%.

Management is opting for leasing instead of purchasing the new facility and machinery to avoid creating a significant liability on the Statement of Financial Position and deteriorating the Debt-to-Equity ratio.

Sales Projections:

Management foresees a recession on the horizon that may result in a 12% drop in unit sales each year for year 20X4 and 20X5, with a bounce back to current sales levels by January 20X6. Sales of 20X6 are estimated to reach 5,000 units with an average selling price of $10,000 per unit. For year 20X7 and after sales are expected to increase by 20% each year. Despite expected fluctuations in sales, management believes that new lines of DX drones must be produced to maintain a competitive edge. Management is uncertain about proceeding with the lease due to the potential impact on the company's profitability.

Launching of DX 2.0:

Currently, AGL is preparing to participate in three exhibitions in the first quarter on 20X4 (Q1) to launch DX 2.0 Canada-wide. DX 2.0 has many new features, most importantly, it can track and film-moving vehicles that are 1,000 km away. So far, the company has shipped 10 drones to its field sales team, who have been tasked with presenting the drone at exhibitions and demoing it for potential customers over the next 60 days. Demo drones are not sold in the market they are returned to the factory for further testing. The variable costs for the 10 drones were $3,200 each. In the first year, the company expects to sell about 500 DX 2.0 drones per year for $10,000 each. These sales are expected to be in addition to the current 5,000 DX drones.

AGL has incurred the following expenses in promoting DX 2.0:

• Promo material for field sales to use in the 3 exhibitions: $220,000
• Mailing expenses on 3 exhibitions to potential customers: $5,000
• Non-refundable payments on 3 exhibition events: $28,000
• Hotel bookings for the sales team: $10,200
• Guest technical speaker fees: $4,000 per exhibition ($2,400 paid and $9,600 will be paid after the third exhibition).

The hotel booking expenses are all refundable if canceled 2 days before the event. The guest technical speaker is paid a non-refundable deposit of 20% of fees for all three exhibitions.

Last week, the engineering team realized that it is best to redesign the hybrid batteries placed in DX 2.0, which will ultimately affect the appearance of the drone. Costs related to redesigning DX 2.0 will amount to a negligible variable cost per drone and no additional fixed costs to company. It will take the engineering and manufacturing team until second quarter of 20X4 (Q2) to redesign, build and deliver a defect-free DX 2.0 to sales teams.

Management needs to decide among the following options:

Option 1:

Go ahead with the 3 exhibitions in Q1 and launch DX 2.0 as is. Delay the battery re-design until 20X5, when much more advanced drones are expected to be produced.

Option 2:

Delay the launch of DX 2 to the second quarter of 20X4 (Q2) to perfect the hybrid batteries. If Option 2 is chosen, it is uncertain what the company will do with the 10 demo units of DX 2.0 it has already manufactured for internal testing. A discount distributor has offered to purchase the units at 50% of the selling price, with no after-sale product warranty. At this time, management believes this retailer is the only available option if the company decides to scrap the current 2.0 model. If DX 2.0 is redesigned, the sales team needs to attend three exhibitions in the second quarter of 20X4, and all exhibition brochures would need to be redone. Should AGL delay the launch of DX 2.0, it would lose the payments it currently has made on exhibition events for Q1. The new DX 2.0 can sell for $11,000 each.

Option 3:

Launch DX 2.0 in Q1 20X4 as is and sell a maximum of 200 drones at $10,000 each. Then, in Q2 20X4, once the hybrid batteries are fixed, launch the drones under a new version, labeling them as DX 3.0. The sales staff would need to attend three exhibitions in Q2 in addition to those attending in Q1. DX3 drones can then be sold for $11,000 each. The company expects to sell 300 units of DX 3.0. Launching two versions in such a short time span worries the sales manager as it may confuse the market, but he still thinks it is a viable option.

Assuming that for options 2 and 3, in order to launch a new drone design, the company still needs to produce and deliver 10 new demo drones and promo materials to the sales team. The mailing and exhibition costs, staff hotel costs and guest technical speaker fees, will be unchanged in other words ignore inflation.

As an AGL consultant, your task is to provide a report with qualitative and quantitative recommendations for the management regarding the decision to expand operations and launch DX2.

Need a table format to compare all three options and recommendations with best possible