A recently completed feasibility study to upgrade XYZ’s computer system shows the following benefits. Compensation figures in parentheses include wages, benefits, and payroll taxes.
a. Market forecasts, which take two $400 person-days a month, will be more accurate with software making the calculations.
b. Effective inventory control will prevent part stockouts and reduce inventory by$1,000,000. XYZ’s cost of capital is 20%.
c. Detailed evaluations of plan changes will increase production flexibility, reduce sales losses, and eliminate two clerks ($75,000 each).
a. Computerized updating of bills of material and operations lists will save 40% of an engineer’s ($100,000) and 25% of a clerk’s ($60,000) time.
b. Computerized calculations of labor allocations, rates, and bonus details will save40% of a clerk’s ($80,000) time.
3. Sales. Improved reporting will enable the five-person sales staff to react more quickly to the market, producing a $10,000 per person sales increase.
4. Marketing. Revised reports and an improved forecasting system will increase net income by $50,000.
a. Quickly determining new product costs will save 30% of the accountant’s ($100,000) time.
b. An incentive earnings system will save 40% of the payroll clerk’s ($60,000) time.
As a board member, which of the benefits can you defend as relevant to the system’s cost justification? Calculate how much XYZ will save with the new system.