Question

QUESTION 1)

Revenue: 10,635,119

COGS: 7,872,775

Gross margin: 2,762,344

Expenses:

Employee admin sal.: 673,475

Employee benefits: 30,162

Info technology, computer repairs: 33,860

telecommunications: 23,874

unsaleable product damage, expired, shortage: 53,170

facilities, rent, amortization: 31,609

automobile including amortization: 62,500

foreign exchange (gains) losses, realised and unrealized: 88,445

customer discounts/rebates and commissions: 160,658

transportation of inventory: 801,523

insurance for inventory: 15,184

stroage costs for inventory: 45,700

interest and bank charges: 15,910

consulting fees: 22,511

advertising, entertainment: 62,520

Total = 2,121,101

Net Income = 641,243

INSTRUCTIONS:

PART A) Please help do a cost/benefit analysis based off the information given above. The operating system suggests that the cost of goods sold is most likely UNDERSTATED, as only the purchase costs paid to the suppliers are captured.

Please re-calculate COGS to make sure that it is an accurate number.

QUESTION 2)

(built off from question 1) - The consultant has quoated the cost of the new software at 100,000. there would also be a hardware upgrade required for 12,000, an annual licensing/operating cost of 13,000, which is 11,000 more than the existing system. You estimate that training in terms of outside help, replacement staff, and staff time to cost is 17,000, of which is 10,000 is for intiial training and 7,000 for additional post-implimentation training. Its estimated that a one year time frame is required for staff to become familiar with the system. Training is to start one month after the software set-up. There are 100 hours allocated for training over the first year. Its estimated that inventory - which is at a steady level during the year - will be reduced by 10% due to the better information of the new system. (they have inventory turn of 20 times.) Also, they would represent an annual saving of 10%. There is also an estimated 10% saving in employee administation salaries from a reduction in manual entries, duplication, and quicker transaction processing. Cash flow should also improve, becaues of the reduction of inventory as noted, which would decrease the interest and bannk charge cost by 15%.

INSTRUCTIONS:

PART B) Do a cost/benefit analysis of this new accoutning software. calculate the benefits from the info given. How long will it take to get a return on the investment (just a simple payback is fine) under different assumptions (like will the firm get all the benefits in year 1 or might it take a year or 2 – also do scenarios around growth rates as that could have an impact).

Answer 1

Income statement
Revenue		10635119
Less: Customer discounts/rebates and commissions		160,658
Net Revenues		10,474,461
Less: COGS
Purchase costs	7872775
Transportation of inventory	801,523
Insurance for inventory	15,184
Stroage costs for inventory	45,700
Total COGS		8735182
Gross Margin		1,739,279
Less: Operating expenses
Employee admin sal.	673475
Employee benefits	30162
Info technology, computer repairs	33860
Telecommunications	23874
Unsaleable product damage, expired, shortage	53170
Facilities, rent, amortization	31609
Automobile including amortization	62500
Consulting fees	22511
Advertising, entertainment	62520
Total operating expenses		993681
Operating Income		745,598
Less: Non-operating expenses
Foreign exchange (gains) losses, realised and unrealized	88445
Interest and bank charges	15910	104355
Net Income		641,243

			% of benefit
Benefits		10,474,461	100.00%
Less: COSTS:
COGS	8735182		83.40%
Operating expenses	993,681		9.49%
Other expenses	104355		1.00%
Total costs		9833218	93.88%
Net benefits		641,243	6.12%

2.. Investment in new software:
Costs	Immediate	Annual
Cost of the new software	100000
One-time hardware upgrade	12000
Annual licensing/opertaing costs		11000
Initial & post implementation training	10000	7000
Reduction in Inventory(See Note)	-43676
Total	78324	18000
Annual savings
Saving in employee administation salaries(673475*10%)		67348
savings in Interest and bank charge cost(15910*15%)		2387
Total annual savings		69734
Net Initial investment	78324
Net annual savings(69734-18000)	51734
Pay-back period of the above investment=
78324/51734=
1.5
Years.
Note:
COGS/Inventory= 20 times (given)
8735182/Inv.=20
So, Inventory =8735182/20
436759