Question

Case: Recreation Unlimited, increasing sales/performance. Recreation Unlimited has provided Deloitte with data to help them evaluate the costs and potential opportunity of improving the website. If Recreation Unlimited chooses to improve their website it will cost them $10M (one-time cost), but they expect that each visitor will spend an additional $1. The profit margin on any products purchased on the website is 50%. How would you evaluate the potential opportunity of improving the website? The client has also provided us with the data point they have 20M people visit the site annually.

Options:
A) Evaluate the potential opportunity based on the provided data.
B) Ignore the provided data and proceed.
C) Evaluate the opportunity without considering costs.
D) Proceed with the improvement without analyzing the data.

Answer 1

To evaluate the improvement opportunity for Recreation Unlimited's website, the anticipated additional profit, equal to the extra revenue from increased sales minus the profit margin, should be compared to the one-time improvement cost. The website improvement costs would be recouped in the first year, with potential for profit increase of $10 million annually thereafter. However, the opportunity cost of alternative investments needs to be considered as well.

Step-by-step explanation:

To evaluate the potential opportunity of improving the website for Recreation Unlimited, consider that they receive 20 million annual visitors and anticipate that each visitor will spend an additional $1 on the website. Given that the profit margin is 50%, the potential additional profit can be calculated as follows:

Additional revenue per year = $1 additional spending per visitor × 20 million visitors = $20 million

Additional profit per year = 50% of $20 million = $10 million

Assuming the estimated additional profits are accurate and consistent year over year, the one-time cost of $10 million to improve the website would be recouped in the first year. Thus, any subsequent years would yield a profit increase of $10 million annually, not accounting for other factors such as maintenance costs or changes in visitor behavior. The decision to proceed with the website improvements should also consider the opportunity cost, which is the cost of not pursuing alternative projects or investments with the $10 million.