Question

! Investing $1,500,000 in TQM's Channel Support Systems initiative will at a minimum increase demand for your products 1.7% in this and in all future rounds. (Refer to the TQM Initiative worksheet in the CompXM Decisions menu.) Looking at the Round 0 Inquirer for Andrews, last year's sales were $163,405,682. Assuming similar sales next year, the 1.7% increase in demand will provide $2,777,897 of additional revenue.   With the overall contribution margin of 34.1%, after direct costs this revenue will add $947,263 to the bottom line. For simplicity, assume that the demand increase and margins will remain at last year's levels. How long will it take to achieve payback on the initial $1,500,000 TQM investment, rounded to the nearest month?

Select: 1

	13 months
	19 months
	TQM investment will not have a significant financial impact
	6 months

Answer 1

We are investing 1.5 million. Payback period is the minimum period in which we receive this investment back in the form of profits.

Increase in Profit for 1st Year = 947,263

Sales for 1st Year = 163,405,682 + 2,777,897 = 166,183,578

Increase in Sales for next 7 months = 1.7% * 7 / 12 = 0.99%

Hence in next 7 months profit will increase by = Sales at end of 1st Year * % Increase * Profit Margin

= 166,183,578 * 0.99% * 34.1%

= 561,982.51

Total Profit increase in 1 year and 7 months (19 Months) = 947,263 + 561,982.51 = 1509,245

ie We have reached our target of our original investment of 1,500,000

We have a payback period of 19 months.