Answer:
Payback = 19 month
Explanation:
Firm has invested in TQM's Channel Support systems of $1,500,000, It will increase demand of product by 1.7%.
Last years sales revenue was $163,290,917, a 1.7% increase will mean the sales will be:
= $163,290,917 * (1+0.017)
= $163,290,917 * (1.017)
= $166,066,862.59
Thus increase in sales revenue is:
= $166,066,862.589 - $163,290,917
= $2,775,945.589
Now consider contribution margin. From Total Sales, direct variable costs are deducted to get total contribution. The Overall contribution margin is It is 34.1%.
So extra contribution due to 1.7% increase in sales is = $2,775,945.589 * 34.1%
= $946,597.45
Thus increase in contribution margin will also increase profit to the same extent as there is no addition in fixed cost due to this project. So firm will be able to recover $946,597.45 of initial investment of $1,500,000 in one year.
Pay back is the time required to recover this full initial investment. It ascertained by dividing $1,500,000 amount by the net addition in profit per year.
Payback = $1,500,000 / $946,597.45
Payback = 1.585 per year * 12 month
Payback = 19.02 month
Payback = 19 month approximately
