Question: In Peloton's new factory, they are debating between two different production methods. Production method 1 will be largely autonomous and results in fixed costs of
In Peloton's new factory, they are debating between two different production methods. Production method 1 will be largely autonomous and results in fixed costs of $3 million to lease robotic machinery, but reduces the variable cost per unit to $500. Production method 2 uses mostly human labor and results in fixed costs of $1 million but variable costs per unit are $1,000. If Peloton can sell its exercise bikes for $3,000 and intends to sell 3,000 units, the degree of operating leverage for Production method 1 is while the degree of operating leverage for Production method 2 is The relationship between the degree of operating leverage for production method 1 and method 2 follows from the fact that holding all else constant, higher fixed costs result in a degree of operating leverage. (Hint: For simplicity, assume no taxes, interest expense, or depreciation)
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
