Chapter 1, Problem 1.27AP

ERP cost-benefit analysis (Learning Objective 5)

As CEO of Aqua Marine, Carrie Easton knows it is important to control costs and to respond quickly to changes in the highly competitive boatbuilding industry. When Rose Consulting proposes that Aqua Marine invest in an ERP system, she 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 Mark Cole reports that the team and Rose estimate that if Aqua Marine implements the ERP system, it will incur the following costs:

1. a. $435,000 in software costs
2. b. $95,000 to customize the ERP software and load Aqua Marine’s data into the new ERP system
3. c. $105,000 for employee training

The team estimates that the ERP system should provide several benefits:

1. a. More efficient order processing should lead to savings of $105,000.
2. b. Streamlining the manufacturing process so that it maps into the ERP system will create savings of $125,000.
3. c. Integrating purchasing, production, marketing, and distribution into a single system will allow Aqua Marine to reduce inventories, saving $225,000.
4. d. Higher customer satisfaction should increase sales, which, in turn, should increase profits by $155,000.

Requirements

1. 1. If the ERP installation succeeds, what is the dollar amount of the benefits?
2. 2. Should Aqua Marine install the ERR system? Why or why not? Show your calculations.
3. 3. Why did Easton create a team to evaluate Rose’s proposal? Consider each piece of cost-benefit information that management accountant Cole reported. Which person on the team is most likely to have contributed each item? (Hint: Which team member is likely to have the most information about each cost or benefit?)