Reference no: EM132547184

Pack-and Go , a new competitor to FedEx , 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 rate ( defined as agreed-upon delivery date/time plus or minus a specified cushion) and (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 2and 3 above .The annual cost of the new technology, for each of the seven metropolitan areas serviced by pack-and Go, 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.

Decision Alternative

Items.                                                                 Current system                     After implementing new technology

On- time delivery rate                                      80%                                    95 %

Variable cost per package lost or damaged             $30                                    $30

Allocated fixed cost per package lost or damage        $10                                  $ 10

Annual no. of packages lost and damage                    300                                   100

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%

Requirement:

Question 1: from a financial perspective , should Pack and Go invest in the new technology? That is, What would be the estimated net change in annual operating profit( to the nearest whole dollar) if the company makes the proposed investment?

Question 2: Based on the data collected by Pack-and Go. the company is fairly confident about the reduction in costs associated with lost or damage packages. However, because of uncertainties in term 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 (to the nearest whole dollar)that would justify the investment in the new technology?

Question 3: What other factors are likely relevant to the present investment decision financing pack-and- Go