Estimate Savings and Impact on ROI
We want our employer to approve a recommendation for a $10,000 investment to conduct safety training and purchase PPE. We want to let the employer know what the return on their investment (ROI) will be after approving the recommendation. Let's look at a step-by-step process to determine total savings and the ROI using the scenario below.
Scenario
Able Construction is a residential construction company that suffered a serious injury accident (fracture). We want to convince the company to approve a one-time investment of $10,000 to help prevent similar serious injury accidents.
The company's annual gross profit is $50 million, with a net profit of $3 million — a 6% profit margin. Based on OSHA Safety Pays Program data, a serious fracture injury would likely incur total accident costs close to $100,000.
To justify the investment, we need to calculate the impact of the accident and the investment in accident prevention on the company's ROI (Return on Investment) based on the given information.
- Gross Sales: $50,000,000
- Net Profit: $3,000,000
- Net Profit Margin: 6% (Construction industry average)
- Total Accident Costs: $100,000 ($50,000 Direct Cost, $50,000 Indirect Cost)
- Investment in Accident Prevention: $10,000
Note: The extent to which the employer pays the direct costs depends on the nature of the employer's workers' compensation insurance policy. The employer always pays the indirect costs.
Calculate Savings and ROI
The following steps can be used to calculate the company's estimated savings and return on investment (ROI)
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What is the impact of the accident on the Net Profit Margin? Net Profit after Accident = Net Profit before Accident - Accident Costs.
Total Accident Costs ($3,000,000 - $100,000 = $2,900,000). -
What is the ROI after the accident: ROI after Accident = (Net Profit after Accident / Total Investment) × 100%.
ROI after Accident = ($2,900,000 / $10,000) × 100% ≈ 29,000%.After the accident, the company's ROI would be approximately 29,000% or 29 times the cost of the investment.
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What would be the additional sales volume to cover the cost of the accident: Additional Net Profit Required = Accident Costs / Net Profit Margin.
Additional Net Profit Required = $100,000 / 0.06 ≈ $1,666,667.The company would need to generate approximately $1,666,667 in additional net profit to cover the cost of the accident.
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How much additional sales volume is needed to generate this extra net profit: Additional Sales Volume Required = Additional Net Profit Required / Net Profit Margin.
Additional Sales Volume Required = $1,666,667 / 0.06 ≈ $27,777,778.Therefore, to cover the cost of the accident, the company would need to generate approximately $27,777,778 in additional sales volume to achieve a 6% net profit margin.
Knowledge Check Choose the best answer for the question.
7-7. To determine how much money a company will ultimately save by investing in safety improvements, you would estimate the _____.
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