Practicing Cost-benefit Analysis: Step 1

Scenario Information:

You are the project manager for a growing company. The sales manager is considering implementing a new computer-based contact management and sales processing system. Your boss has asked you to determine whether the request is feasible from a financial aspect.
Currently, the sales department is not computerized. Each salesperson creates her own noncomputerized customer database by writing the contact information for prospective and current customers on large index cards and organizing them in a centrally located filing cabinet. Each time a customer or prospect is contacted, a salesperson updates that contact's index card. Once every two months, salespeople send mailings targeted toward current customers in the database. Once every three months, they send mailings targeted toward prospects in the database. Printed supplies for these activities cost the sales department $65,000 each year. At $20 an hour, it takes a salesperson 30 minutes to create and file an index card for a new prospect; and 15 minutes to locate, update, and refile an index card for a follow-up phone call with a current customer or prospect for whom an index card already exists. In one day, a salesperson typically contacts six new prospects and follows up with ten current customers or prospects already in the database. Each salesperson works 236 days a year and generates an average of $250,000 per year. Additionally, all ten employees have been with the company for more than a year.
The sales manager polled her salespeople, and only two of the ten said they were comfortable using computers. The benefit of staying with the current system is that employee morale won't go down. The sales manager figures that keeping morale up would save the company $125,000 a year.
The sales manager wants each member of her sales team to have a desktop computer. Each new computer will cost $1,225; the cost includes the necessary supporting software, but the company will still have to pay a software license fee each year. This annual fee is $1,200. Additionally, the sales manager wants to subscribe to three online lead databases: the first one costs $55 per month, the second one costs $40 per month, and the third one costs $60 per month.
Because the sales manager wants all of the computers to be networked together, the sales department will also need its own server, including the cabling and installation. After researching these needs as project manager, you learn that the server will cost $1,750 to buy and approximately $200 per month to maintain. The cabling and installation will run $2,300. Finally, the sales manager proposes that the department lease a heavy-duty printer that everyone will share. The lease for the printer and the necessary printing supplies will cost approximately $300 a month. And of course, all the salespeople will need to be trained to use the new system; the training will cost $200 per person.
In spite of the training the salespeople will receive, the sales manager anticipates that the company will lose money due to user error: approximately $10,000 in sales and $10,000 in time during the first month of operation. However, she also estimates that the new computer-based contact management and sales processing system will reduce the time for adding new prospects to the database down to 15 minutes, and the time for updating the database after a follow-up phone call to seven and one-half minutes. She estimates that sales will increase by at least $50,000 a year because customers and prospects will be contacted in a more timely manner.

Step 1: List and calculate the costs.

Estimated Costs for the Current System for One Year
Item	Calculations	Total
contacting new prospects	Multiply 30 minutes by six new prospective customers to get 180 minutes. Divide 180 by 60 minutes to get three hours. Multiply three hours by $20. The total is $60 per day for contacting new prospects. Multiply 236 workdays by $60 per day, which comes out to $14,160 per sales person per year. Multiply $14,160 by ten salespeople.	$141,600
contacting current customers or prospects already in the database	Multiply 15 minutes by ten customers to get 150 minutes. Divide 150 by 60 minutes to get two and one-half hours. Multiply two and one-half hours by $20. The total is $50 per day for contacting current customers or prospects already in the database. Multiply 236 work days by $50 per day, which comes out to $11,800 per salesperson per year. Multiply $11,800 by ten salespeople.	$118,000
printed supplies	n/a	$65,000
Total estimated costs:		$324,600

Estimated Costs for the Proposed System for the First Year
Item	Calculations	Total
contacting new prospects	Multiply 15 minutes by six new prospective customers to get 90 minutes. Divide 90 by 60 minutes to get 1.5 hours. Multiply 1.5 hours by $20. The total is $30 per day for contacting new prospects. Multiply 236 workdays by $30 per day, which comes out to $7080 per sales person per year. Multiply $7080 by ten salespeople.	$70,800
contacting current customers or prospects already in the database	Multiply 7.5 minutes by ten customers to get 75 minutes. Divide 75 by 60 minutes to get one and one-quarter hours. Multiply one and one-quarter hours by $20. The total is $25 per day for contacting current customers or prospects already in the database. Multiply 236 work days by $25 per day, which comes out to $5,900 per salesperson per year. Multiply $5,900 by ten salespeople.	$59,000
software license fee	n/a	$1,200
networked computers with supporting software	Multiply 10 by $1,225.	$12,250
server	Multiply $200 by 12 months, and add that amount to $1,750.	$4,150
cabling and installation	n/a	$2,300
leasing a new printer and purchasing printing supplies	Multiply $300 by 12 months.	$3,600
online subscriptions	Multiply $55 by 12 months; the total is $660. Multiply $40 by 12 months; the total is $480. Multiply $60 by 12 months; the total is $720. Add the three totals together for a final total.	$1,860
training	Multiply $200 by 10.	$2,000
lost sales in first month of operation	n/a	$10,000
lost time in first month of operation	n/a	$10,000
Total estimated costs:		$177,160

Step 2: List and calculate the benefits.

Estimated Benefits for the Current System for One Year
Item	Calculations	Total
		$
		$
		$
		$
		$
Total estimated benefits:		$

Estimated Benefits for the Proposed System for One Year
Item	Calculations	Total
		$
		$
		$
		$
		$
Total estimated benefits:		$