Coho Brakes and Auto Parts Limited is a distribution company whose mobile sales force covers large territories of automotive repair shops and automobile dealerships. The company's partial income statement is as follows:

Coho Brakes and Auto Parts Limited

Income Statement (partial)

Year Ended March 31, 2012

Sales ................................................. $25,000,000

Less: Sales returns .............................. 3,000,000

Net sales .............................................22,000,000

Cost of goods sold .............................13,585,000

Gross profit ......................................... 8,415,000

Operating expenses ........................... 7,500,000

Profit before income tax........................ 915,000

Coho's manager is concerned that, while sales have been increasing steadily, profits have not. Sales returns of 12% of sales are much greater than the industry average of 8.5%. Upon further investigation, it was determined that the company's process of manually recording customer order data is producing a large number of order errors. As these errors are caused by Coho's sales staff, Coho absorbs the handling costs of sales returns. The problem is made worse because many products have been customized and cannot be resold. The following is an estimate of the cost of these order-processing errors:

Coho is investigating a mobile electronic order system that would cost the company $200,000 for its first year of operations but would reduce the percentage of returned sales to a figure in line with the industry average (8.5%).
Instructions
With the class divided into groups, do the following:
(a) Review the calculation of the cost of order-processing errors. Recalculate the estimated cost assuming the electronic order system (with 8.5% returns) was purchased. Should the electronic order system be purchased?
(b) Consider the impact on customer relationships if Coho continues to use its current manual order management system. Would you recommend a change in system even if the financial analysis completed in question (a) is negative?

Transcribed Image Text:

Sales returns Percentage of products that are not resaleable Sales value of unsaleable products Average cost as a percentage of sales Cost of unsaleable products Additional operating expenses Total estimated costs $3,000,000 45% 1,350,000 70% $ 945,000 150,000 $1,095,000