Investing $2,000,000 in TQM\'s Channel Support Systems initiative will at a mini

Question

Investing $2,000,000 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.xls Decisions menu.) Looking at the Round 0 Inquirer for Andrews, last year's sales were $163,608,638. Assuming similar sales next year, the 1.7% increase in demand will provide $2,781,347 of additional revenue. With the overall contribution margin of 34.2%, after direct costs this revenue will add $951,221 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 $2,000,000 TQM investment, rounded to the nearest month?

Explanation / Answer

Initial investment = $ 2,000,000

Total revenue = $ 951,221

Assuming that demand increase and margins remain the same for the next year and all the subsequent periods:

Revenue would again increase by $951,221 (every year)

Formula used:

No of months to payback = (Initial investment / revenue ) * 12 Solution:

No. of months to payback = (2,000,000 / 951,221)*12 = 2.1025

Which is equivalent to 2 years and one month or 25 months.

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