Youâ€™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 skillset as well as the
As the controller of ABC Company, the CEO has come to you with a new
opportunity that heâ€™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 ABCâ€™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
I. An overall risk profile of the
company based on current economic and industry issues that it may be
II. Current company cash flow
a. You need to complete a cash flow
statement for the company using the direct method.
b. Once youâ€™ve completed the cash flow statement, answer the following
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 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
c. Assuming ABC Company wants a 40% gross margin for the new product, what
selling price should it set for the expansion product?
d. 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
factoryâ€™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
There are no reviews yet.