Cindy Alexander, Turner, Inc’s vice president of marketing, has received a sales call from a vendor of customer relationship management (CRM) software. The vendor claims that the software and other data her company provides will enable Turner to target its advertising more appropriately and to identify new markets. The average improvement in sales volume from CRM is 10%, with no increase in advertising costs. The cost of the software and related services is $1,200,000. Turner depreciates software over five years. The company’s current cash-basis income statement, based on sales of 60,000 units, follows.

Required

a. Calculate the payback period for the software if Turner, Inc. realizes the reported average improvements.

b. Compare the payback period to the useful life of the software. Is the payback period adequate?

c. Calculate the accounting rate of return the software will generate.

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Sales revenue $6,000,000 Cost of goods sold (all variable) 2,700,000 Gross margin Less operating expenses Selling expense (50% variable) Administrative expense (all fixed) 3,300,000 $ 900,000 2,000,000 2,840,000 Income $ 460,000