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.
1. Production
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).
2. Engineering
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 save 40% 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.
5. Accounting
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.
REQUIRED
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. (SMAC Examination, adapted)
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