Carliss Hyde, Truell, Inc.'s vice president of marketing, has received a sales call from a vendor of customer relationship management (CRM) software. The vendor claims that the software and other data her company provides will enable Truell to target its advertising more appropriately and to identify new markets. The average improvement in sales volume from CRM is 10%, with no increase in advertising costs. The cost of the software and related services is $1,800,000. Truell depreciates software over five years. The company's current cash-basis income statement, based on sales of 75,000 units, follows.

Required
a. Calculate the payback period for the software if Truell, Inc. realizes the reported average improvements.
b. Compare the payback period to the useful life of the software. Is the payback period adequate?
c. Calculate the accounting rate of return the software willgenerate.

Transcribed Image Text:

Sales revenue Cost of goods sold (all variable) Gross margin Less operating expenses $7,500,000 3,000,000 4,500,000 Selling expense (50% variable) Administrative expense (all fixed) $1,200,000 3,000,000 4,200,000 300,000 Income