Question

Serenity Spa Vacations Inc. (SSV) is a company that specializes in organizing tours of luxury health and wellness spas around the world. During the first four years of its business, SSV experienced modest growth. Just over a year ago, however, the company was featured in an exclusive travel magazine. This, coupled with excellent web reviews and favourable word of mouth, fuelled a period of exponential growth that continues to this day. As there are a number of other well-established companies that offer similar services, SSV’s management knows that to continue its success, it must expand its loyal customer base by providing exemplary service and tours while controlling costs. SSV’s accounting information system (AIS) currently consists of a purchased accounting software package that has only basic features and cannot be upgraded. It is supplemented by various spreadsheets used to track important information, including payroll, spa availability, bookings in progress, client preferences, and customer ratings of the wellness packages sold. SSV’s vice-president of operations understands that the company’s current AIS is woefully inadequate and must be replaced with one that permits management to better direct the organization’s activities. The vice-president has requested you, CPA, the company’s chief financial officer, investigate the options that are available and make a recommendation as to how to proceed. The vice-president stated that the criteria Intermediate Financial Reporting 1 Project 1 6 / 6 considered should include cost, reliability, ability to accommodate continuing growth, reducing duplicative data entry, functionality, and compatibility with online purchases by customers. You have eight people working for you in the accounting department in two locations and as such know that multi-user capabilities over a networked system are a must. You are well aware of the inadequacies of the current system and the issues they are causing, and have researched various possibilities. You have narrowed the choice down to three options as described below, all of which meet the criteria of compatibility, multi-user functionality, network capability, and reducing duplicative data entry. • Commercial package in the cloud (CPC) — SSV can arrange to access a widely used commercial software package for $2,750 per month based on an 18-month rental agreement. Your research suggests that the software package is very reliable, represents a significant improvement over SSV’s exiting AIS, and includes 100% of the identified “must haves” and about 60% of SSV’s “nice to haves.” Arranging access and uploading existing data take about two weeks. When a cloud-computing solution is used, expanding capacity is easily arranged at an additional cost. Moreover, as the host regularly upgrades the system on an ongoing basis, potential obsolescence isn’t a major factor. • Commercial package purchased (CPP) — SSV can purchase the software package described above for $90,000. Installation of the program and conversion of the existing program will take about six weeks. The expected useful life of the new software is four years. Expanding capacity at a later date is easily accommodated by adding an additional module at a relatively nominal cost. • Custom-built package (CBP) — You received two quotes from software engineers to custom build a system that meets all of SSV’s identified needs. The first engineer, who is very well known and has an excellent track record in building similar systems, quoted a price of $150,000. She suggests that the system will take about one year to build and install. The second engineer, who is new to the industry, promises delivery in six months at a firm cost of $80,000. The expected useful life of the custom-built software is four years. The system can be expanded at a later date; however, the expansion would have to be a customized solution, designed by a software engineer, at a cost that will likely be substantively higher than acquiring additional capacity for the CPP. Required: Use the CPA Way to assess this situation and make a recommendation to the vicepresident of operations of SSV.

Answer 1