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ACC 206 Week 5 Final Paper ABC Company




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


Paper#73626 | Written in 18-Jul-2015

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