A logistics manager (named LM) has considered replacing the firm’s manual customer order management system (current system, CS) with electronic ordering, a web-based application (new system, NS). LM estimates the CS, including labour, costs $3/order for order transmission and processing when annual order volume is under 20,000. Should the order volume equal or exceed 20,000 in any given year, LM will need to hire an additional customer service representative to assist order reception in the manual process. This would raise the variable cost to $3.5/order. LM also estimated the rate of errors in order placement and transfer to be 0.008 orders. On the other hand, the NS would cost $150,000 upfront to implement, and the variable costs are determined to be $0.5/order regardless of volume. The NS could acquire and maintain order information with an error rate of 2/10,000 orders. However, a web-based specialist would be required to maintain the NS at all times, whose salary is $40,000 in the first year and increases 3.5% each year after that. Order errors cost, on average, $8 per occurrence, to correct in the CS, whereas such order errors are estimated to cost $10.00 in the NS since the specialist inspects the system for flaws on most occasions. (Assume no discounting on time-value of money.)

1. If the firm expects order volume over the next four years to be 18,000, 21,000, 25,000 and 31,000 annually, would the NS pay for itself within the first four years? Quantitatively justify your decision.
2. What other effects aside from cost might LM consider when implementing the NS?