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Final cost information wk5




Question;You?ve just been hired onto ABC Company as the corporate controller. ABC Company is amanufacturing firm that specializes in making cedar roofing and siding shingles. The companycurrently has annual sales of around $1.2 million, a 25% increase from the previous year. Thecompany has an aggressive growth target of reaching $3 million annual sales within the next 3years. The CEO has been trying to find additional products that can leverage the current ABCemployee 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?sbeen working on. The CEO would like to use the some of the shingle scrap materials to buildcedar dollhouses. While this new product line would add additional raw materials and be moretime-intensive to manufacture than the cedar shingles, this new product line will be able toleverage ABC?s existing manufacturing facilities as well as the current staff. Although thisproduct line will require added expenses, it will provide additional revenue and gross profit tohelp reach the growth targets. The CEO is relying on you to help decide how this project can beafforded Provide details about the estimated product costs, what is needed to break even onthe project, and what level of return thisI. An overall risk profile of the company based on current economic and industry issues that itmay be facing.II. Current company cash flowa. 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 questionsi. What does this statement of cash flow tell you about the sources and uses of thecompany 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 companyobtain the additional financing, equity or corporate debt, and why?III. Product cost: ABC Company believes that it has an additional 5,000 machine hours availablein the current facility before it would need to expand. ABC Company uses machine hours toallocate the fixed factory overhead, and units sold to allocate the fixed sales expenses. Bases oncurrent research, ABC Company expects that it will take twice as long to produce the expansionproduct 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 salesexpenses. How much cheaper does this expansion make the existing product?c. Assuming ABC Company wants a 40% gross margin for the new product, what sellingprice should it set for the expansion product?d. Assuming the same sales mix of these two products, what are the contribution marginsand break-even points by product?IV. Potential investments to accelerate profit: ABC company has the option to purchaseadditional equipment that will cost about $42,000, and this new equipment will produce thefollowing savings in factory overhead costs over the next five years:Year 1, $15,000Year 2, $13,000Year 3, $10,000Year 4, $10,000Year 5, $6,000ABC Company uses the net-present-value method to analyze investments and desires a minimumrate of return of 12% on the equipment.a. What is the net present value of the proposed investment (ignore income taxes anddepreciation)?b. Assuming a 5-year straight-line depreciation, how will this impact the factory?s fixed costs foreach 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, wouldyou recommend that ABC Company purchases the equipment? Why or why not?


Paper#54694 | Written in 18-Jul-2015

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