Problem: Degree of Operating Leverage. Untouchable Package Service (UPS) offers overnight package delivery to Canadian business customers. UPS has recently decided to expand its facilities to better satisfy current and projected demand. Current colume totals two million packages per week at a price of $12 each, and average variable costs are constant at all output levels. Fixed costs are $3 million per week, and profit contribution averages one-third of revenues on each delivery. After completion of the expansion project, fixed costs will double, but variable costs will decline by 25%.
1. Calculate the change in UPSâ??s weekly breakeven output level that is due to expansion.
2. Assuming that volume remains at two million packages per week, calculate the change in the degree of operating leverage that is due to expansion.
3. Again, assuming that volume remains at two million packages per week, what is the effect of expansion on weekly profit?
4. Define economies of scale. How does this relate to returns to scale? Cite and briefly discuss the main determinants of economies of scale.