Response to the following:
Problem asked you to perform a quantitative analysis to help SeaSpray's managers decide whether to install an ERP system. Now consider some qualitative factors.
Required
1. Why did Ron Greenwood create a team to evaluate IDG's proposal? Consider each piece of cost-benefit information that management accountant Mike Cobalt reported. Which person on the team is most likely to have contributed to each item?
(Hint: Which team member is likely to have the most information about each cost or benefit?)
2. Quantifying ERP benefits can be difficult. After further discussion, the team predicts that there is a 60% chance that the ERP installation will succeed and a 40% chance that it will fail. Should SeaSpray still install the new ERP system?
Problem:
As CEO of SeaSpray Marine, Ron Greenwood knows it is important to control costs and to respond quickly to changes in the highly competitive boat-building industry. When IDG Consulting proposes that SeaSpray invent in an ERP system, he forms a team to evaluate the proposal: the plant engineer, the plant foreman, the systems specialist, the human resources director, the marketing director, and the management accountant>
A month later, management accountant Mike Cobalt reports that the team and IDG estimate that if SeaSpray implements the ERP system, it will incur the following costs over the next six months:
a. $350,000 in software costs
b. $80,000 to customize the ERP software and load SeaSpray's data into the new ERP system
c. $125,000 for employee training
The team estimates that the ERP system should provide several benefits:
a. More-efficient order processing should lead to savings with a present value of $185,000.
b. Streamlining the manufacturing process so that it maps into the ERP system will create savings with a present value of $275,000.
c. Integrating purchasing, production, marketing, and distribution into a single system will allow SeaSpray to reduce inventories, saving $220,000.
d. Higher customer satisfaction should increase sales, which in turn should increase the present value of profits by $150,000.
The team knows that because of complexity, some ERP installations are not successful. If SeaSpray's fails, there will be no cost savings and no additional sales. The team predicts that there is an 80% chance that the ERP installation will succeed and a 20% chance that it will fail.
Required
1. If the ERP installation succeeds, what is the dollar amount of the benefits?
2. Should SeaSpray install the ERP system? Why or why not? Show your calculations.