SolarFlex is a small but very innovative manufacturer of cutting-edge solar panels. A significant portion of the company's success is due to technologically superior product design. SolarFlex has invented a flexible photovoltaic panel that utilizes solar energy much more efficiently than traditional panels. Due to its flexible properties, SolarFlex's panels are also very resistant to weathering and the normal wear and tear associated with traditional panels. This has made SolarFlex panels especially popular among certain green-minded companies and individual customers. SolarFlex's management team is made up of a number of high-profile executives that have extensive experience in the energy industry. Many equity investors and analysts believe the firm is poised to experience exponential growth in the coming years because of the growing popularity of environmentally friendly products and green engineering. However, a number of key industry experts warn that the market for SolarFlex's new technology is much riskier than what many believe. They point out that the market is always risky for high-tech start-ups, especially those with new and unproven technology.
The regular price for SolarFlex's main product, the Flex 1000 panel, is $600. The firm expects to sell 380,000 units in the coming year, and sales are expected to increase during the following years.
Right now SolarFlex produces its Flex 1000 panel at a small factory it recently purchased and uses some equipment it purchased from a leading industry manufacturer. The rest of the equipment is on lease. Currently, SolarFlex manufactures about 62% of the parts in its photovoltaic panels.
SolarFlex’s management team has decided that it must reconfigure its manufacturing process in order to remain competitive. They decide to implement a plan to increase the number of purchased parts (to about 82%) and to reduce the complexity of the manufacturing process. This would allow SolarFlex to remove the leased equipment and to raise some cash by selling some of the purchased equipment currently used in the plant.
The per-unit manufacturing costs for 380,000 units of Flex 1000 follow:
Current Manufacturing Proposed Manufacturing
Costs Costs
Materials and purchased parts $180 $195
Direct Labor 55 62.5
Variable overhead 70 80
Fixed overhead 90 55
General, selling, and administrative variable costs are $25 per unit and total fixed costs are $2,050,000; these costs are not expected to differ for either the current or the proposed manufacturing plan.
Required
1. Compute the contribution margin per unit and the breakeven point in units for the Flex 1000 panel, both before and after the proposed reengineering project.
2. Determine the number of sales units at which SolarFlex would be indifferent between the current manufacturing plan and the proposed plan.
3. Explain briefly (a) SolarFlex’s strategy, and (b) if SolarFlex should undertake the proposed reengineering plan. Using a spreadsheet, support your answer with a sensitivity analysis and a discussion of both short-term and long-term considerations. Your sensitivity analysis should show the amount of projected operating income under each plan as volume goes from 0 units to 900,000 units per year, in increments of 100,000 units.
4. Using the results obtained from the sensitivity analysis conducted in (3) above, construct (in a single graph) the profit-volume equation for each of the two decision alternatives.
5. Calculate and interpret the degree of operating leverage (DOL) for each decision alternative at Q = 400,000 units and at Q = 600,000 units.