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
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
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