ACC 206 Week 5 Final Paper ABC Company

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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 $1.2M, a 25% increase from the previous year. The company
has an aggressive growth target of reaching $3M annual sales within the next 3
years. The CEO has been trying to find additional products that can leverage
the current ABC employee skillset 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
like would add additional raw materials as well as 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.
While this product line will require added expenses, it will also 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 file for some
specific cost and profit information to complete the calculations.



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



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?

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’s got 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. 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?

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?

c. Assuming ABC Company wants a 40% gross margin for the new product, what
selling price should they sell the expansion product for?

d. Assuming the same sales mix of these two products, what are the contribution
margin and the break-even point 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?

 

V. Conclusion:

 

a. What are the major risk factors
that you see in this project?

b. As the Controller and a management accountant, what is your responsibility
to this project?

c. What do you recommend the CEO do?

 

 

 
 

Based on Chapter 5's
  exercise 5

 

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