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Final cost information wk5

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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 $1.2 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 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;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?;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 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?;Attachments;Final_cost_information_wk5.xlsx (17.61 KB)

 

Paper#30565 | Written in 18-Jul-2015

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