Fred Doyle, assistant controller, was analyzing alternative ways of increasing gross margin of Somerset Corporation, a manufacturer of fashion clothing. He knew that the following relationship existed between the increase in the sales levels through retention of customers (dX) and the increase in gross margin (dY): dY = (0.60) * (dX)
The marketing and department provided information about four different alternative plans of improving the retention rate of customers.
Alternative 1 Improving quality will retain 20 customers who might have otherwise switched suppliers. Each retained customer will bring in sales revenues of $21,000 on average. The improvements in quality will come through two measures: switching to a substitute material that will cost $8,500 per customer, and purchasing an automatic inspection unit that will cost $80,000.
Alternative 2 An increase in advertising will likely retain 12 customers at an average sales revenue of $25,000 per customer. Increased advertising will cost the company $200,000.
Alternative 3 A price discount will retain 18 customers at an average sales revenue of $30,000 per customer. The discount offer will cost the company $240,000 in lost contribution margin. In addition, the company must spend $70,000 in advertising the sales discount promotion to customers.
Alternative 4 The company has made improvements in the process which will improve its on-time delivery performance by 28% over the previous year. Consequently, it can retain 32 customers at an average sales revenue of $20,000 per customer. Improvements in the process cost the company cost the company as follows: (1) increase in labor costs $170,000, (2) increase in processing costs due to flexible processing technology $180,000, and (3) increase in miscellaneous costs $26,000.
Required
(a) Compute the cost-benefit of the four alternatives.
(b) Which of the above alternatives would you recommend to the operations manager of the company? Why?

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The Answer of Fred Doyle, assistant controller, was analyzing alternative ways of increasing gross margin of Somerset Corporation, a manufacturer of fashion clothing. He knew that the following relationship existed between the increase in the sales levels through retention of customers (dX) and the increase in gross margin (dY): dY = (0.60) * (dX)
The marketing and department provided information about four different alternative plans of improving the retention rate of customers.
Alternative 1 Improving quality will retain 20 customers who might have otherwise switched suppliers. Each retained customer will bring in sales revenues of $21,000 on average. The improvements in quality will come through two measures: switching to a substitute material that will cost $8,500 per customer, and purchasing an automatic inspection unit that will cost $80,000.
Alternative 2 An increase in advertising will likely retain 12 customers at an average sales revenue of $25,000 per customer. Increased advertising will cost the company $200,000.
Alternative 3 A price discount will retain 18 customers at an average sales revenue of $30,000 per customer. The discount offer will cost the company $240,000 in lost contribution margin. In addition, the company must spend $70,000 in advertising the sales discount promotion to customers.
Alternative 4 The company has made improvements in the process which will improve its on-time delivery performance by 28% over the previous year. Consequently, it can retain 32 customers at an average sales revenue of $20,000 per customer. Improvements in the process cost the company cost the company as follows: (1) increase in labor costs $170,000, (2) increase in processing costs due to flexible processing technology $180,000, and (3) increase in miscellaneous costs $26,000.
Required
(a) Compute the cost-benefit of the four alternatives.
(b) Which of the above alternatives would you recommend to the operations manager of the company? Why?

Fred Doyle, Assistant Controller, Was Analyzing Alternative Ways of Increasing