Barklay's Technologies Inc. (BTI) is a manufacturing company with facilities in North America, Europe and Asia. The company's board of directors has passed a resolution to increase corporate social responsibility by various means. In this regard management is evaluating whether or not to implement new control systems that will also be part of future robotics platforms. The company sees robotics as a way of repatriating work from countries who are not providing workers with safe working conditions, appropriate remuneration, or an environment that respects human rights. In addition, improved production processes will increase environmental sustainability by reducing material waste.
In Winnipeg the company has a machine shop that produces parts for warehouse storage systems. The following table presents financial information for the past year:
| Revenue | $14,750,000 |
| Cost of goods sold | (8,850,000) |
| Gross profit | $5,900,000 |
| Operating expenses | 1,230,000 |
| Operating income | $4,670,000 |
The capital cost of a new control system will be $1,900,000 which will be amortized using straightline amortization over five years with no salvage value. The new system will permit a reduction in scrap and direct labour costs, resulting in a decline in variable costs of 8%. The new system will reduce downtime and the resulting increase in customer satisfaction from on-time delivery is expected to translate to a 2% increase in revenue. Operating expenses will be unchanged.
Required:
| 1. | What is the incremental break-even in sales dollars assuming that cost of goods sold is a |
variable cost?
| 2. | What will be the effect on operating income from implementing this change in the first year? |
| 3. | How many years will it take to cover the capital cost of the new control system from the |
increased revenue and cost savings.
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