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Pargon Sports costs benefits of customer service improvement

Pargon Sports, a major sporting goods retailer, is considering upgrading its customer-support activities by improving online databases and training customer-service personnel. Consider the following data:

Data Input
Discount rate 10%
Annual sales $15,000,000
Average cost of sales as % of sales 60%
Sales growth 4%
Predictions related to new customer service:($000)
Increase in customer satisfaction 10%
Software and training costs for new customer service $300,000
Ongoing operating costs for new customer service $400,000
Cost savings from reduction of email response service ($100,000)
Additional sales growth 6%
Without new customer service Year 1 Year 2 Year 3 Year 4
Sales $15,600,000
Cost of sales 9,360,000
Gross margin $6,240,000
With new customer service Year 1 Year 2 Year 3 Year 4
Sales $16,500,000
Cost of sales 9,900,000
Gross margin 6,600,000
Increase in gross margin 360,000
Increased operating costs
Software and training costs for new customer service 300,000
Ongoing operating costs for new customer service 400,000
Cost savings from reduction of email response service (100,000)
Total increased operating costs 600,000
Difference in profit $(240,000)
Net Present Value - years 1-3

Prepare an analysis of the costs and benefits of Paragon sports' Propose customer-services improvements (Ignore taxes).

Solution Preview

See Excel attached.

The project looks worthwhile. The initial training is an "investment" but it will pay off in later years when the growth from happy customers outpaces the typical growth rates without this upgrade. ...

Solution Summary

Your tutorial completes the NPV analysis sheet and discusses the best decision. Reasons are given.

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