The chief information officer recommends that a new computer and software costing $100,000 be purchased and installed because it will decrease administrative costs by $4 per hour and management allocation by $2 per hour, resulting in a 10 percent increase in profits. Will this change have the desired effect on profit?
a) yes b)no
To determine if the change will have the desired effect on profit, we need to calculate the cost savings and compare it to the increase in profits.
First, let's calculate the cost savings:
- The decrease in administrative costs is $4 per hour.
- The decrease in management allocation is $2 per hour.
- Let's assume that the computer and software will be used for 2,000 hours per year (you can adjust this number based on your estimate).
Total cost savings per year = (decrease in administrative costs + decrease in management allocation) * hours of use
= ($4 + $2) * 2,000
= $12,000
Now, let's calculate the increase in profits:
The question states that the change will result in a 10% increase in profits. Let's denote the current profit as P.
New profit = P + 10% of P
= P + 0.1P
= 1.1P
So, the increase in profits is 0.1P.
Now, we can compare the cost savings to the increase in profits:
Cost savings ($12,000) > Increase in profits (0.1P)
To make a definitive conclusion, we need to know the value of P (current profit). If the increase in profits (0.1P) is greater than or equal to the cost savings ($12,000), then the change will have the desired effect on profit. Otherwise, it will not.
Please provide the value of the current profit (P) to complete the calculation and determine the answer.