Youve just been hired onto ABC Company as the corporate controller. ABC Company is a manufacturing firm

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Question:

You’ve just been hired onto ABC Company as the corporate controller. ABC Company is a manufacturing firm that specializes in making cedar roofing and siding shingles. The company currently has annual sales of around $1.2 million, a 25% increase from the previous year. The company has an aggressive growth target of reaching $3 million annual sales within the next 3 years. The CEO has been trying to find additional products that can leverage the current ABC employee skill set as well as the manufacturing facilities.

As the controller of ABC Company, the CEO has come to you with a new opportunity that he’s been working on. The CEO would like to use the some of the shingle scrap materials to build cedar dollhouses. While this new product line would add additional raw materials and be more time-intensive to manufacture than the cedar shingles, this new product line will be able to leverage ABC’s existing manufacturing facilities as well as the current staff. Although this product line will require added expenses, it will provide additional revenue and gross profit to help reach the growth targets. The CEO is relying on you to help decide how this project can be afforded Provide details about the estimated product costs, what is needed to break even on the project, and what level of return this product is expected to provide.

In order to help out the CEO, you need to prepare a six- to eight-page report that will contain the following information (including exhibits, but excluding your references and title page). Refer to the accompanying Excel spreadsheet (available through your online course) for some specific cost and profit information to complete the calculations.

I. An overall risk profile of the company based on current economic and industry issues that it may be facing.

II. Current company cash flow

a. You need to complete a cash flow statement for the company using the direct method.

b. Once you’ve completed the cash flow statement, answer the following questions:

i. What does this statement of cash flow tell you about the sources and uses of the company funds?

ii. Is there anything ABC Company can do to improve the cash flow?

iii. Can this project be financed with current cash flow from the company? Why or why not?

iv. If the company needs additional financing beyond what ABC Company can provide internally (either now or sometime throughout the life of the project), how would you suggest the company obtain the additional financing, equity or corporate debt, and why?

III. Product cost: ABC Company believes that it has an additional 5,000 machine hours available in the current facility before it would need to expand. ABC Company uses machine hours to allocate the fixed factory overhead, and units sold to allocate the fixed sales expenses. Bases on current research, ABC Company expects that it will take twice as long to produce the expansion product as it currently takes to produce its existing product.

a. What is the product cost for the expansion product under absorption and variable costing?

b. By adding this new expansion product, it helps to absorb the fixed factory and sales expenses. How much cheaper does this expansion make the existing product?

b. Assuming ABC Company wants a 40% gross margin for the new product, what selling price should it set for the expansion product?

c. Assuming the same sales mix of these two products, what are the contribution margins and break-even points by product?

IV. Potential investments to accelerate profit: ABC Company has the option to purchase additional equipment that will cost about $42,000, and this new equipment will produce the following savings in factory overhead costs over the next five years:

Year 1.....................................$15,000

Year 2.....................................$13,000

Year 3.....................................$10,000

Year 4.....................................$10,000

Year 5.....................................$ 6,000

ABC Company uses the net-present-value method to analyze investments and desires a minimum rate of return of 12% on the equipment.

a. What is the net present value of the proposed investment (ignore income taxes and depreciation)?
b. Assuming a 5-year straight-line depreciation, how will this impact the factory’s fixed costs for each of the 5 years (and the implied product costs)? What about cash flow?

c. Considering the cash flow impact of the equipment as well as the time-value of money, would you recommend that ABC Company purchases the equipment? Why or why not?

I. An overall risk profile of the company based on current economic and industry issues that it may be facing.

Overall risk of business based on company and its current economic condition which based on issues and facing the problems related to company. It’s a manufacturing company and company based on current economic condition and sometime industry faces issued relate to business. After serving global is financial crises mechanism of prices will reduced due to change in inflation of organization. A rival among industries reduce hope to grow but a global economic condition. Global economic condition focuses on overall risk and based on current economic predicament of composure. Economic condition affect prices and control the industry that are associated to achieve business goals and risk maintain access to project ability of raise in company.

II. Current company cash flow

a. You need to complete a cash flow statement for the company using the direct method.

Cash flow Statement Company

ABC Co

Cash Flow

Dec, 31, 201x

Sales.......................................................................................................................$ 1,200,000

Cost of goods sold...................................................................................................$ 800,000

selling and administrative expenses.....................................................................$ 250,000

Depreciation expense...............................................................................................$ 70,000

Income taxes..............................................................................................................$ 30,000

Dividends declared and paid during 20X2...........................................................$ 100,000

ABC purchased $100,000 of equipment for cash on August 14, 20X2.............$ 100,000

Balance.....................................................................................................................$ (90,000)

Once you’ve completed the cash flow statement, answer the following questions:

What does this statement of cash flow tell you about the sources and uses of the company funds?

Cash flow of company determines income of company is less than the expenses; a major expense in this year is Purchase equipment. Financial data is important for every organization to assess the financial position of company. Financial data use by investors to examine the worth of company and will invest in future to get more in return. There are two main types of data sources one is internal and other is external. Internal data collect from financial statements of company. Company’s cash flows, accounts, balance sheet, income statements and other financial data help to find out the position of company. Other source of financial data is from outside the organization is called external data source. External data sources are journal, databases, Government information etc. Internal financial information can be easily examined by investors. The financial data can directly provide information about financial position of company. Financial information validity is also important to keep accurate record about company. Auditor is a person who can watch dog the accounts of company. Internal auditor checks and balance all accounts of company, external auditor check the internal auditor report.

ii.

Is there anything ABC Company can do to improve the cash flow?

Yup! Increase in sales will improve to increase capacity of business and increase cash flow as well. It is not good to take cash within company for a long period of time.

iii.

Can this project be financed with current cash flow from the company? Why or why not?

The change in cost of capacity to trigger out operations and efficiently manage the activity that performed to update the estimated level of information. The permanent sources based on capacity that is related to cost and information to process the capacity and estimate the resources to trigger out services provided to customers.

To compute the cost it is important to find the based then what will be the percentage of business activities take for this project that will paid in the business. Capacity based on measurement that related to the supplies and usually expressed the unit costing depends on usable spaces and other cost structures.

iv.

If the company needs additional financing beyond what ABC Company can provide internally (either now or sometime throughout the life of the project), how would you suggest the company obtain the additional financing, equity or corporate debt, and why?

The cost of has been calculated when company need to determine the cost of production and will meet the requirement of business. Costing system helps to determine the requirement of business to generate the cast based activity. Manufacturing meat products it is important to meet the requirement of business. The activity based costing includes all items used for the production of products and services. For cost of purchasing the material and pool of resources required in this activity that will used to purchase equipment and will include the activity to increase items. Purchasing the material activity include the cost of building for purchasing, cost of direct labor and cost of indirect overheads.

III.

Product cost: ABC Company believes that it has an additional 5,000 machine hours available in the current facility before it would need to expand. ABC Company uses machine hours to allocate the fixed factory overhead, and units sold to allocate the fixed sales expenses. Bases on current research, ABC Company expects that it will take twice as long to produce the expansion product as it currently takes to produce its existing product.

What is the product cost for the expansion product under absorption and variable costing?

Cost of greater differences has the different proportion that based on actual differences for reflection. The costing drives on the production that varies from direct labor and direct machine. The product produces the complex and simple products that provide accurately reflect major contribution and difference that usage across the production objectives of company. Many manufacturing companies assign the units to produce the underlying items which occur to increase the cost of overhead tradition. Traditional accounting can allocate the cost which also associated for production process and will sold the goods finally to internal and external users of company.

By adding this new expansion product, it helps to absorb the fixed factory and sales expenses. How much cheaper does this expansion make the existing product?

Operational management help organization to achieve its objective by timely manages all the business activities, to run the business smoothly. Operational management makes many decisions in correlation with the strategic management in case of large amount of money or other resources are involved. Operational activities helps the organization to achieve its long term goals and objectives by planning and designing all activities in by keeping in mind the strategic objective of organization in their mind. In case of wall-mart the alignment between the operational management and strategic objective is very important because it is a large store with allot of products and employees so in order to manage all of them. Wall-mart needs operational efficiency in all of its activities so that they are able to apply just in time strategy effectively.

Assuming ABC Company wants a 40% gross margin for the new product, what selling price should it set for the expansion product?

Limited price control needs to contain the budget and fix prices ensure the MSC affordable cost within territory. Member interested to fix the product and only translate through production prices. Production cost depends on the cost of values for sales and control rate of supplies that might be helpful. Price control the necessary competition that sufficiently well obtain the control and helpful for interview the price evolutions. Good practices control the substances that hazardous to generate the principle to overlap the process. To get high quality product with low prices helps to generate good performance.

Assuming the same sales mix of these two products, what are the contribution margins and break-even points by product?

The traditional cost of every activity depends on cost of information and other items. The traditional cost will allocate the production machines and to take the break between causes on the basis of number of products. Cost of greater differences has the different proportion that based on actual differences for reflection. The costing drives on the production that varies from direct labor and direct machine. The product produces the complex and simple products that provide accurately reflect major contribution and difference that usage across the production objectives of company.

ABC Company has the option to purchase additional equipment that will cost about $42,000, and this new equipment will produce the following savings in factory overhead costs over the next five years:

Year 1 ……….……. $15,000

Year 2 ………...……$13,000

Year 3 ………...……$10,000

Year 4 ……….……..$10,000

Year 5 ………...……. $6,000

ABC Company uses the net-present-value method to analyze investments and desires a minimum rate of return of 12% on the equipment.

What is the net present value of the proposed investment ignore income taxes and depreciation?

Assuming a 5-year straight-line depreciation, how will this impact the factory’s fixed costs for each of the 5 years (and the implied product costs)? What about cash flow?

Considering the cash flow impact of the equipment as well as the time-value of money, would you recommend that ABC Company purchases the equipment? Why or why not?