Problem
A service company is considering the installation of a new automated processing system to improve the operations of its back-office services. The current system has annual fixed costs of $450,000 and variable costs of $80 per client-order processed. At present, the annual volume of client orders is 25,000. The new automated system would involve a larger annual fixed cost of $2.5 million; however, the variable cost of processing a client-order would only be $10. The price charged to a client for processing an order is $100.
a) Assuming the price of a client-order would remain the same if the new system were to be implemented, what is the annual volume beyond which the new system would become economically more attractive than the current system? Explain.
b) Given the current volume of business, should the company implement the new system? Explain.
c) Because the new system would reduce significantly the amount of time needed to process a client-order, the company estimates that the price charged to a client could be increased to $105 per order, and even with the higher price, the annual volume of client-orders would increase to 28,000. Should the new system be implemented? Explain.