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The Costs and Benefits Associated with Amazon’s New, Drone-based Amazon Prime Delivery System

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Introduction

This report analyzes the costs and benefits associated with Amazon’s new, drone-based Amazon Prime delivery system. This report examines several cost-benefit components – such as Breakeven Point, Contribution Margin, and Return on Investment (ROI) – to determine the advantages associated with such revolutionary delivery systems. Additionally, this report presents a model that was created to compare Amazon Prime’s drone-based delivery system with UPS’s human-run delivery system. The model addresses the differences in cost and efficiency between the two systems, accounts for delivery distances within Indianapolis, and provides more clarity on certain topics discussed in BUS-A 202. Through this report, the aforementioned factors will conclude if drone-based delivery systems are more cost effective than human-run delivery systems.

Breakeven Analysis

When forming a conclusion on the most efficient form of package delivery, multiple scenarios must be analyzed, all costs must be considered, and a breakeven point must be identified. The breakeven point is the sales volume at which a business earns neither a profit, nor a loss. Identifying the breakeven point is particularly useful when determining the impacts of changes in capacity, automation, and product pricing.

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In regards to UPS’s human-run delivery system, the breakeven point is $0.71 per package. Referencing the data provided, the average delivery driver can deliver 1,350 packages per week for a total of 70,200 packages per year. Furthermore, annual delivery costs associated with each driver reach $49,842. By further dissecting these numbers it is evident that each package delivered must provide more than $0.71 in profit, or the company will face a loss.

As seen in the Appendix section, the drone-based delivery system is clearly more cost effective than the human-run delivery system. In contrast to the human-run system, the cost of each drone can be amortized over its entire life span of 5 years. This allows managers to better allocate time and resources as the drones have a more definitive life span than the humans. Additionally, as technology continues to improve, the costs associated with drones will decrease which will then decrease the costs associated with drone-based delivery systems.

Contribution Margin Analysis

In addition to the Breakeven Analysis, analyzing a company’s contribution margin helps to identify specific cause and effect relationships that affect the bottom line. The contribution margin is a product’s price minus all associated variable cost, resulting in the incremental profit earned for each product sold. The total contribution margin created by a company represents the total earnings available to pay for fixed expenses and generate a profit.

With both delivery systems, the contribution margin is marginally significant. This happens to be the case because the analysis was performed under the assumption that each drone and driver operates exactly 50 hours per week. Under those circumstances, there are no variable costs associated with the projects and therefore the contribution margin will only be affected by changes in revenue.

In the future – as drone technology becomes more advanced – it could be possible that certain variable costs become relevant. However, right now most of the focus will be placed on initial capital expenditures and the recoup of said expenditures. The upfront costs with these revolutionary projects can be substantial and it will be another daunting challenge for Jeff Bezos to tackle

Return on Investment (ROI)

While there are countless ways to analyze projects like the Amazon Prime delivery system, a majority of managers and investors base their “accept or deny” conclusion by focusing on the Return on Investment (ROI). ROI is used to evaluate the efficiency of investments by measuring the amount of return over the investment’s cost. To calculate the performance of an investment, the return of the investment is divided by the cost of the investment. The resulting percentage is the ROI, which can be easily compared with the returns of other investments.

As is the case with any project started by Amazon executive Jeff Bezos, the Amazon Prime delivery system boasts an astounding ROI. Assuming each drone operates at just 10% of UPS’s capabilities, Amazon will need a $0.12 profit per delivery to earn a 100% ROI over the 5 year life of each drone. This target profit should be relatively easy to reach because Amazon has several areas that can provide additional revenue, if needed.

To generate additional revenue to help the drone delivery project, Amazon could increase their Amazon Prime fees or add additional pricing layers to different membership programs. Another option would be to charge a small fee for each delivery a drone makes, or charge the customer for each item delivered by drone. With these methods, Amazon would be guaranteed to cover any additional costs associated with the drone-based delivery system and minimize any risk associated with the project.

Conclusion

Overall, Amazon has much to gain if their drone project becomes operational in the

near future. It is clear that the Amazon Prime drone-based delivery systems are more cost effective than human-run delivery systems and will substantially increase efficiency throughout the industry. With Amazon’s current business model and client base, Jeff Bezos

could gain a strong advantage over both retailers and parcel delivery companies. The swift delivery and uniqueness of drone-based delivery will bring more business to the e-commerce behemoth and will aid in their business expansion. The benefits and revenues of the drone-based delivery system far outweigh the costs of the system as whole. The operating logistics of the delivery system are still a bit vague, but the assumptions made in the report were all made using knowledge provided to the class. Logically, the specifics and logistics of the Amazon Prime delivery system are likely to change. For now, the analysis performed signals that Amazon should proceed with the drone-based delivery project and continue to lead the industry in innovative practices.

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