QUESTION 1 Revenue 10635119 COGS 7872775 Gross margin 276234

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).

Solution

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