You are the owner of a successful new internet company that ships paper products to consumers. After 10 years in business you’ve built your revenue to $67.5 million per year, however, your profit margin is slim and you want to exercise care in any changes you make. Your current customer service level is 90% and you believe raising your service level may allow you to increase your price and earn a high-profit margin. However, you are unsure if higher profits will justify the investment needed. You are considering trying to raise the service level to either 95% or 99%.

A 95% customer service level will require:

• -A $2 million investment in a new stock locator system for the warehouse (increases debt and fixed assets from 100% option)
• -An increase in average inventory of 10% (from 100% option)
• -A new contract carrier with a slower but less expensive service reducing transportation costs by 20% (from 100% option; add in additional reshipment ---cost after calculating 20% decrease)
• -The average revenue per order will increase to $140

A 99% customer service level will require:

• -$2 million investment in a new stock locator system for the warehouse (increases debt and fixed assets from 100% option)
• -An increase in average inventory of 15% (from 100% option)
• -A new contract carrier with faster and more expensive service increasing transportation cost by 8% (from 100% option; add in additional reshipment cost after calculating 8% increase)
• -The average revenue per order will increase to $150.

Information for the 90% customer service level is given below. Use this information to determine if the effort to improve customer service levels should be made.

• -Annual orders 500,000
• -The average revenue per order $135
• -The average cost of goods sold per order $95
• -Transportation costs $2,500,000
• -Warehousing costs $1,950,000
• -Debt $40,000,00
• -Interest on debt 8%
• -Cash $100,000
• -Average inventory $6,700,000
• -Inventory carrying cost 13%
• -Accounts receivable average $350,000
• -Other operating costs $1,000,000
• -Fixed assets $85,500,000
• -Current tax rate 21%

• -Of orders not filled correctly
  • . 12% of customers cancel the order
  • . 75% of customers require:
    • . Reshipment $120 per order
    • . Discount $60 per order

1. a. Calculate the ROA if no service failures occur. (Use data as given.)
2. b. Calculate the ROA for a 90% customer service level. (Use data as given.)
3. c. Calculate the ROA for a 95% customer service level.
4. d. Calculate the ROA for a 99% customer service level.