Chapter 1, Problem 1.28AP

Online order system cost-benefit analysis (Learning Objective 5)

Ferguson Gas wants to move its sales order system online. Under the proposed system, gas stations and other merchants will use a secure site to check the availability and current price of various products and place an order. Currently, customer service representatives take dealers’ orders over the phone; they record the information on a paper form, then manually enter it into the firm’s computer system.

CFO Stacey Wilson believes that dealers will not adopt the new online system unless Ferguson Gas provides financial assistance to help them purchase or upgrade their computer systems. Wilson estimates this one-time cost at $760,000. Ferguson Gas will also have to invest $160,000 in upgrading its own computer hardware. The cost of the software and the consulting fee for installing the system will be $220 000. The online system will enable Ferguson Gas to eliminate 25 clerical positions. Wilson estimates that the benefits of the new system’s lower labor costs will have saved the company $1,340,000.

Requirements

Use a cost-benefit analysis to recommend to Wilson whether Ferguson Gas should proceed with the online ordering system. Give your reasons, showing supporting calculations.