Charles Backus, the controller, estimates the dollar value of the unfillable cus
ID: 2538154 • Letter: C
Question
Charles Backus, the controller, estimates the dollar value of the unfillable customer’s orders overthe two-day period is $825,000.He believes that forty percent of those orders can be filled.‘The restoration and analysis labor costs of repairing the system are $220,000.The normal rateof return on sales for Boise Toys is 20 percent due largely to the Internet auction systems usedwith vendors.The shutdown of the vendor site required the emergency purchase of toy productfrom higher priced venders and increased shipping costs that together totaled $175,000.Mr. Backus believes the shut-down will affect Boise’s rate of return.He provides the followingestimates: (1) 60 percent chance of a 10 percent decrease’ or a 40 percent chance of a 25 percentdecrease.Estimate the preliminary loss of Boise Toys.Is there anything else the Mr. Backusshould consider in making the loss estimate?
Explanation / Answer
Answer
Lost on sales: $825,000 x .60 = $495,000
Cost of cyber attack:
1.Systems repair = $220,000
2. Added misc. costs = $175,000
3. Lost profit* $495,000 x .032 = $15,840
Total loss = $410,840
Working:
The average drop in the annual rate of return on sales:
Normal Rate x Decrease = Change x Probability of Change
20% x 10% = 2% x 60% = .012
20% x 25% = 5% x 40% = .020
Total Decrease in rate of return on sales = .032