Financial Analysis to attain breakeven in various scenario and plan to increase our presence in other metros in near future

Assignment Taken

To attain breakeven in a year and plan to increase our presence in future in phase manner

Case Understanding

The courier business has opted to join the 'Hyper-Local Delivery area for local delivery. The company's goal is to create the business's drone line and, over time, become the industry leader via constant innovation. The company has taken all permissions, including registration and license issuance security clearances. The Budget allotted for this drone department is ten crores for 2021-22. There has been an enthusiastic welcome from clients, including food delivery companies, a few Pharma Chains & Internal Local deliveries. The company has opted for short-range drones, considering the cost factor as an essential decision variable. For becoming the industry leader, the company needs to focus on all areas such as marketing, finance, HR, IT, etc. However, financial break-even is a crucial scenario, as it wants to make it profitable.

BCS Solution Summary

To calculate breakeven, we need 2 thing, top line and the cost. Both foxed cost and variable cots are already given in the case and we need to calculate revenue per drone in 3 cases i.e. in case of equal demand, when demand for lighter weights are more and when demand for heavier weights are more. Once we get the revenue per drone in each case, then we calculated number of drones.

Solution

First let us discuss all the assumption taken to solve this case:

1. We have considered that drone operates for 12 hours in a day
2. It takes approximately 30 minutes for a drone to fulfill the order including pickup and drop at the desired location as in the case it is mentioned that it can cover 5 kms in 15 minutes
3. We concluded that each drone can fulfill 24 orders per day
4. Since we are having the monopoly, so we have considered that demand is always there.
5. Consider Short Range Drone and Qualified Drone operators as variable costs
6. Management Team, Software, Software Development team and Support Staff are the fixed cost. Also presently we are operating only short range drone so large range drone are also consider in fixed cost.
7. We have considered uniform demand for 1 to 5 kg courier and thus effective mean comes out to be 3 kg and similarly for 5 to 10 kg courier the mean comes out to be 7.5 kgs
8. Currently, we have considered only one city i.e. Mumbai

So based on these assumptions, first we have calculated fixed cost for all the cost mentioned in the case. We have ignored the rental and electricity expense as it is already calculated in overall business financial.

Fixed cost calculation is shown in the image and is calculated to be INR 1,15,40,000/-

Variable cost i.e. cost for increase in single unit of drone is INR 7,25,000/- (Short Drone cost i.e. INR 1,25,000/- + Drone Operator i.e. INR 50,000*12= INR 6,00,000/-)

Once we got the cost, it’s time to forecast the revenue to get the contribution margin and in return breakeven.

For revenue, we have consider 3 cases :

1. When there is equal demand across all category of weights i.e.

Demand for 0 to 0.5 kg = Demand for 0.5 kg to 1 kg = Demand for 1 kg to 5 kg = Demand for 5 kg to 10 kg = 6 order per day per drone

2. When demand of lighter weights are more compared to higher weights:

Demand for 0 to 0.5 kg = Demand for 0.5 kg to 1 kg = 3x = 9 order per day per drone

Demand for 1 kg to 5 kg = Demand for 5 kg to 10 kg = x = 3 order per day per drone

3. When demand of heavier weights are more compared to lighter weights:

Demand for 0 to 0.5 kg = Demand for 0.5 kg to 1 kg = x = 3 order per day per drone

Demand for 1 kg to 5 kg = Demand for 5 kg to 10 kg = 3x = 9 order per day per drone

So based on these assumptions we have calculated revenue per drone for each case

1. In case of equal demand, revenue per drone was INR 27,70,350/-

2. In case when demand for lighter weights is more, revenue per drone was INR 16,91,775/-

3. In case when demand for heavier weights is more, revenue per drone was INR 38,48,925/-

 

To achieve breakeven we used following formula:

Fixed Cost + Variable cost per drone*number of drone = number of drone * revenue per drone

Number of drones= Fixed Cost / (Revenue per drone – Variable cost)

Based on above formula, we calculated breakeven (to be achieved in 1 year) for all 3 cases i.e.

Case – 1 Equal demand, number of drones = 6

Case – 2 Focus on lighter order, number of drones = 12

Case – 3 Focus on heavy order, number of drones = 4

 

Phase- 2 : If our plan works in Mumbai, then we can plan to expand in other metro cities i.e. Chennai, Kolkata, New Delhi, Bangalore and Hyderabad for short range drone

Phase – 3: Once our short range drone proves successful, then we can expand our business to large range drone i.e. metro cities connecting Tier -II cities and so on.

Conclusion

For equal demand we need additional 2 short range drones (already have 4) to attain breakeven in a year. When demand for lighter weights is more, additional 8 short range drones (already have 4) to attain breakeven in a year. When demand for heavier weights is more, no additional short range drones (already have 4) to attain breakeven in a year

Attached File Details

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