Cindy Alexander, Turner, Inc.’s vice president of marketing, has received a sales call from a vendor of customer relationship management (CRM)…

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Cindy Alexander, Turner, Inc.’s vice president of marketing, has received a sales call from a vendor of customer relationship management (CRM) software. The vendor claims that the software and other data her company provides will enable Turner to target its advertising more appropriately and to identify new markets. The average improvement in sales volume from CRM is 10%, with no increase in advertising costs. The cost of the software and related services is $1,200,000. Turner depreciates software over five years. The company’s current cash-basis income statement, based on sales of 60,000 units, follows.

Sales revenue                                                                         $6,000,000

Cost of goods sold (all variable)

2,700,000

Gross margin                                                                           3,300,000

Less operating costs

$900,000

2,000,000

2,900,000

Income                                                                                       $ 400,000

(A) Calculate the payback period for the software if Turner, Inc. realizes the reported average improvements?

(B) Calculate the accounting rate of return the software will generate?

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