You are the owner of a successful new internet company that ships paper products to consumers. After
Question:
You are the owner of a successful new internet company that ships paper products to consumers. After 10 years in business you’ve built your revenue to $67.5 million per year, however, your profit margin is slim and you want to exercise care in any changes you make. Your current customer service level is 90% and you believe raising your service level may allow you to increase your price and earn a high-profit margin. However, you are unsure if higher profits will justify the investment needed. You are considering trying to raise the service level to either 95% or 99%.
A 95% customer service level will require:
- -A $2 million investment in a new stock locator system for the warehouse (increases debt and fixed assets from 100% option)
- -An increase in average inventory of 10% (from 100% option)
- -A new contract carrier with a slower but less expensive service reducing transportation costs by 20% (from 100% option; add in additional reshipment ---cost after calculating 20% decrease)
- -The average revenue per order will increase to $140
A 99% customer service level will require:
- -$2 million investment in a new stock locator system for the warehouse (increases debt and fixed assets from 100% option)
- -An increase in average inventory of 15% (from 100% option)
- -A new contract carrier with faster and more expensive service increasing transportation cost by 8% (from 100% option; add in additional reshipment cost after calculating 8% increase)
- -The average revenue per order will increase to $150.
Information for the 90% customer service level is given below. Use this information to determine if the effort to improve customer service levels should be made.
- -Annual orders 500,000
- -The average revenue per order $135
- -The average cost of goods sold per order $95
- -Transportation costs $2,500,000
- -Warehousing costs $1,950,000
- -Debt $40,000,00
- -Interest on debt 8%
- -Cash $100,000
- -Average inventory $6,700,000
- -Inventory carrying cost 13%
- -Accounts receivable average $350,000
- -Other operating costs $1,000,000
- -Fixed assets $85,500,000
- -Current tax rate 21%
- -Of orders not filled correctly
- . 12% of customers cancel the order
- . 75% of customers require:
- . Reshipment $120 per order
- . Discount $60 per order
- a. Calculate the ROA if no service failures occur. (Use data as given.)
- b. Calculate the ROA for a 90% customer service level. (Use data as given.)
- c. Calculate the ROA for a 95% customer service level.
- d. Calculate the ROA for a 99% customer service level.