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

Essay

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?