Question

Cost is a big issue with every company, and changing the technology is the biggest cost for most companies, how companies were able to cope with this problem and maintain the level of profit in a very competitive market?

Answer 1

Cost for technological change may be very high in a company – suppose a new autonomous machine is installed which required a large investment. If this whole investment cost is considered as an expense, then it requires to be charged to the income statement in the year of purchase. This makes a huge fall of profit, tentatively would be a loss.

In order to prevent such scenario, this cost has to be considered as capital expenditure that gives benefits throughout its life-years. Therefore, an investment in new technology is an asset and would be recorded in the balance sheet (but not in income statement).

Every year a portion of such value would be considered as recurring expense (depreciation) to be charged to the income statement. If this thing is done, profit of the company could be protected and it becomes competitive.   

Example: suppose the cost of new technology is 2,500,000. This is a balance sheet item and each year suppose 10% is to be charged to the income statement as depreciation, which is (2,500,000 × 10% =) $250,000. Suppose the written down value of new technology after the 1st year is (2,500,000 – 250,000 =) $2,250,000.