home / study / business / accounting / accounting questions and answers / one of the subsidiary of the company dronedelivery sdn bhd is producing delivery drones. with ...

Your question has been answered

Let us know if you got a helpful answer. Rate this answer

Question: One of the subsidiary of the company Dronedelivery Sdn Bhd is producing delivery drones. With the...

One of the subsidiary of the company Dronedelivery Sdn Bhd is producing delivery drones. With the existing technology, their variable per unit is $480 and annual fixed cost, including maintenance expenses, total $1,120,000. However, with the proposed new technology variable costs, are projected to be cut in half to $240 per unit while fixed costs are expected to double to $3,240,000. Given the anticipated new costs structure and no change in the pricing structure of the drones, the breakeven level of sales is expected to increase from 3800 units currently to 4300 units with the new production method. Current sales are 4000 units an average price of $800. They figure out that 6,000 units is a reasonable expected sales level, with standard deviation of above 1,100 units. You might think 6,000 units is an overly optimistic sales forecast, but with our large and growing backlog of orders they have every confidence that they will make or exceed 6,000 unit target.

Required

a) Calculate the degree of operating leverage (DOL) for the company?

b) Based on the DOL and the risk profile of the product and the demand, should the company move to adopt the new technology? The new technology will cost $20,000,000 with a useful life of 4 years. The existing technology has a net book value of $10,000,000 and a useful life of also 4 years.

c) What are the qualitative considerations that you must take in decision?