Chapter 1, Problem 1.33BP

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

Union 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 Kate Bronson believes that dealers will not adopt the new online system unless Union Gas provides financial assistance to help them purchase or upgrade their computer network. Bronson estimates this one-time cost at $765,000. Union Gas will also have to invest $150,000 in upgrading its own computer hardware. The cost of the software and the consulting fee for installing the system will be $240,000. The online system will enable Union Gas to eliminate 25 clerical positions. Bronson estimates that the new system’s lower labor costs will have saved the company $1,370,000.

Requirements

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