Cost Analysis

Paragon Foods Estimated Income Statements

Paragon is a medium-size food distributor that consists about 51 to 200 employees throughout the entire company (Linkedin, n.d.; Glassdoor, n.d.). In recent data, the company is employing 125 to 135 employees and is hoping to grow to 175 employees within the next few years (Schooley, 2014; Buzzfile, n.d.; Manta, 2013). According to various resources such as Glassdoor (n.d.) and the Pittsburgh Post-Gazette (Lindeman, 2012), Paragon’s total revenue about $100 to $500 million a year; specifically, $124.7 million in 2013 (Manta, 2013) to $134.4 million projected in 2017 (Buzzfile, 2017). Paragon does not disclose financial information further than their total revenue; therefore, little is known about Paragon’s total fixed and variable costs and implementation cost of their current information system. However, their recent investment in the warehouse facility to incorporate a manufacturing sector in 2015 cost them a total of $12 million dollars. The company hopes to see a return of investment (ROI) with a few years after construction in 2016 (Schooley, 2014).


From what is known about the company, Paragon can afford to invest in the Enterprise subscription package of the JustFoodERP system. Since Paragon’s total revenue is estimated to be $134.4 million in 2017, the income statement below (see Table 1.1) reflects this revenue. Note this the values or costs in the income statement below are estimated values and not all expenses are listed below because Paragon does not disclose their financial information. In terms of rent and building cost in the fixed cost section, Paragon just build a $12 million facility. Since the government caps banks to lend business loans at $5 million, Paragon paid out of pocket at least $7 million (SBA U.S. Small Business Administration, n.d.). Additionally, business loans are usually paid within three to 10 years (SBA U.S. Small Business Administration, n.d.; Ondeck, n.d.). With these assumptions, the rent/building cost can be divided over the 3 (i.e. $5,000,000/3 years = $1,666,666.67/year) or 10 (i.e. $5,000,000/10 years = $500,00/year) years. Interest on these loans are 6.5% on a 3-year loan (i.e. $108,333.33) and 7.0% on a 10-year loan (i.e. $35,000) (Prosser, 2017). Since this is a new facility, it is assumed that the cost of equipment is a part of the building cost; therefore, there are no other loans or interest expense in the fixed cost category. Since amortization and depreciation expenses are not disclosed (i.e. intangible assets such patents and tangible assets such as equipment costs are unknown) and no basic or average rate of the cost, it is assumed that Paragon takes at least two fifths (40%) of their revenue to pay for these costs (i.e. $53,760,000). In terms of insurance, the rate is normally $10 per $1000 of revenue (Niedbala, 2016). Since Paragon makes $134.4 million, the total cost of insurance is $1,344,000. Operating cost to keep the warehouse running is about 10% of revenue or $13,440,000 (E Source Consumer Direct, 2007). Since there are other variables and factors that contribute to fixed costs, 5% of the revenue (i.e. $6,720,000) is allocated to fixed costs.


Unlike fixed cost, the company has a few variable costs such as employee salary and food in the warehouse. Since food distribution companies move food quickly, variable costs are very low. For employee salary, the average salary in the food distribution industry is about $66,000 (Indeed, 2017). Since Paragon is hoping to employee about 175 employees in the next couple of years, the salary line is budgeted for 175 employees (i.e. $66,000 times 175 employees = $11,550,000). Food in the warehouse should be low because one, food spoils quickly; two, food must circulate quickly to guarantee freshness; and three, food must be sold to generate revenue. Therefore, this line will only account for food that has been damaged or lost at 1% of revenue (i.e. 1,344,000). For all other variable costs, 5% of the revenue (i.e. $6,720,000) is allocated to variable costs. For taxes, is it estimated that 20% of revenue (i.e. $26,880,000) will be deducted for taxes. After subtracting all expenses and taxes from the revenue, Paragon will have enough net income to implement the Enterprise subscription package of JustFoodERP. Note that this income statement is not included in the cost structure and budget to implement JustFoodERP. Knowing and estimating Paragon’s income statement will help determine which JustFood package is right for the company and how much of their budget can they allocate to implementing a new system. Therefore, the purpose of estimating the income statement for Paragon is for an understanding of how Paragon can move forward in determining their ERP system decisions.


JustFoodERP Packages

JustFoodERP uses a one-time license, subscription model of software suite in which costs are determined on a per-user basis (JustFood, n.d. c). There are two primary methods of deployment, cloud and on-ground, which have significant differences in costs (i.e. cloud is $300/month/user and on-ground is $0). Officially, the full pricing is considered confidential but estimates are listed on the JustFood’s website as well as some IT Software review sites (JustFood, n.d. c).  


Choosing a JustFoodERP Package for Paragon

Since Paragon’s net income for 2017 is about 10 million dollars, the company can implement the best subscription package, Enterprise, to help the business function and operate more efficiently. The Enterprise subscription implements all features with the ability to customize functionality to meet the unique needs of Paragon. Additionally, the package is ideal for companies that require large scale implementations that span multiple locations, business units and product lines. Since Paragon is wanting to expand in terms of number of employees and, eventually, locations and products, this package is best for its value. Estimated Enterprise launch costs for Paragon are based on the following criteria:
1.    Cloud-Based Subscription:
·      Cloud requires less time for implementation; no need to stop operation
2.    Enterprise Level implementation:
·      Data Migration
·      Costing based on the assumption migration will be less expensive with Cloud
·      Training Costs Vary by method chosen (ITQlick, n.d.):
o   End-user training
o   Group/Department training
o   Video /self training
o   Train the trainer approach
o   Customization Costs are highly varied- Enterprise subscription includes the features Paragon needs currently
·      Customization Costs are highly varied- Enterprise subscription includes the features Paragon needs currently
Costs for JustFood’s Enterprise Package

The one-time implementation cost for the Enterprise subscription is $1,002,000 for 135 employees and $1,210,000 for 175 employees (i.e. $300,000 for one time software cost and $5,200 per employee for one time user license cost) (ITQlick, n.d.). Since Paragon is hoping to increase their staff in the new future, the implementation cost is budgeted for both 135 employees and 175 employees in.

Paragon’s JustFoodERP fixed costs consist of the cloud-based subscription ($300/user) and high-speed internet ($2,999.88/year) (ITQlick, n.d.; Verizon, n.d.). Cloud access will require high-speed internet, which would result in a higher recurring internet bill than regular internet and On-Ground. However, the Cloud access will benefit the distribution company due to data migration. Based on 135 employees, the total fixed cost is $488,999.88/year and $632,999.88/year for 175 employees.

Paragon’s JustFoodERP variable costs consist of training costs (i.e. $163,080/year/135 employees and $211,400/year/175 employees) and add-on costs ($60,000/year), which includes applications for all parts of the organization from finance credit card integration to warehouse handheld scanners and to climate control data recording in the facility (ITQlick, n.d.). Since the add-on options that are not included in the Enterprise subscription package and are crucial for Paragon’s success compared to their competitors, it is necessary for Paragon to budget for these costs (JustFood, n.d. c).

Customization costs is based on what Paragon wants and needs; therefore, $1 million is allocated and budgeted for this cost. Since JustFoodERP does not list other implementation cost, Paragon should allocate about $2 million for the “just-in-case” scenario for the first year of implementation. While the technology will be there for implementing the new software, the vision and uniformity of the transformation plan must be in place to be successful (McAfee, 2014). The total variable cost is $3,223,080/year for 135 employees and $3,271,400/year for 175 employees. Overall, the cost for installing this system is $4,714,079.88 for 135 employees and $5,114,399.88 for 175 employees.


One-Time Implementation Costs for Enterprise Package 


Fixed Costs to Implement Enterprise Package

Variable Costs to Implement Enterprise Package

Additional Costs for Paragon

Customization cost is significantly more complex to calculate than licensing cost as it depends on functional requirements and specific needs. Here are few key items that affect customization cost:
·      Data elements you need to track and present with a dashboard/reports
·      Dashboard, management and operational reports that are needed
·      Workflows and how complex they are
·      Forms to collect additional data
·      User Interface changes
Since Paragon is investing in the Enterprise subscription package, the following add-on options are the only additional cost (see Additional Costs for Paragon for the full list of Add-on Options for JustFoodERP):
·      Advanced Security Features and Options
·      Credit Card Processing
·      Advanced Reporting and Analytics

Return on Investment for Paragon

Companies calculate Return on Investment (ROI) when they allocate funds for an asset or an investment that is expected to generate revenue and profit in the future, also known as a capital expenditure (Knight, 2015). This differs from allocating funds for an asset that will reduce waste and save costs (Austin, Nolan, & O’Donnell, 2016). However, since reducing waste and saving money can occur while revenue increases, calculating ROI for Paragon will consider all these cost savings. Paragon’s investment in the Enterprise subscription of JustFoodERP is a logical step for Paragon to generate more profits for the distribution and manufacturing company. Four basic steps are required to calculate ROI: determine the initial cash outlay; forecast the cash flows from the investment; determine the minimum return required by the company; and evaluate the investment (Knight, 2015). Since many of the costs for JustFoodERP are estimated, it is difficult to calculate the ROI rate. From what is known about the system, JustFoodERP should minimize waste, increase food moment in the warehouse, decrease food stored in the warehouse and increase efficiencies. Therefore, when evaluating the ROI, JustFoodERP should decrease the variable cost for food stored in the warehouse (i.e. $1,344,000). Although this variable cost is not high, Paragon is not at lost for the cost of implementation and installment of the software. Additionally, Paragon can potentially earn more revenue and profits by generating more sales through its user-friendly interface for buyers and storing and data collection capabilities to increase pre-cut vegetable sales in their manufacturing sector. While automating the systems for auditing JustFood with the ERP software, costs will be kept to a minimum due to decreased man hours (Bateman, 2017).

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