Question

Investing $1,500,000 in TQM's Channel Support Systems initiative will at a minimum increase demand for your products 1.7% in this and in all future rounds. (Refer to the TQM Initiative worksheet in the CompXM Decisions menu.) Looking at the Round 0 Inquirer for Andrews, last year's sales were $163,290,917. Assuming similar sales next year, the 1.7% increase in demand will provide $2,775,946 of additional revenue. With the overall contribution margin of 34.1%, after direct costs this revenue will add $946,598 to the bottom line. For simplicity, assume that the demand increase and margins will remain at last year's levels. How long will it take to achieve payback on the initial $1,500,000 TQM investment, rounded to the nearest month

Answer 1

Payback = 19 month

Step-by-step explanation:

Firm has invested in TQM's Channel Support systems of $1,500,000, It will increase demand of product by 1.7%.

Last years sales revenue was $163,290,917, a 1.7% increase will mean the sales will be:

= $163,290,917 * (1+0.017)

= $163,290,917 * (1.017)

= $166,066,862.59

Thus increase in sales revenue is:

= $166,066,862.589 - $163,290,917

= $2,775,945.589

Now consider contribution margin. From Total Sales, direct variable costs are deducted to get total contribution. The Overall contribution margin is It is 34.1%.

So extra contribution due to 1.7% increase in sales is = $2,775,945.589 * 34.1%

= $946,597.45

Thus increase in contribution margin will also increase profit to the same extent as there is no addition in fixed cost due to this project. So firm will be able to recover $946,597.45 of initial investment of $1,500,000 in one year.

Pay back is the time required to recover this full initial investment. It ascertained by dividing $1,500,000 amount by the net addition in profit per year.

Payback = $1,500,000 / $946,597.45

Payback = 1.585 per year * 12 month

Payback = 19.02 month

Payback = 19 month approximately