Focus of the Final PaperYou’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 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 spreadsheet (available through your online course) for some
specific cost and profit information to complete the calculations.
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? 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?
Writing the Final Paper
1. Must be six to eight double-spaced pages in length, and formatted
according to APA style as outlined in the Ashford Writing Center.
2. Must include a title page with the following:
a. Title of paper
b. Student’s name
c. Course name and number
d. Instructor’s name
e. Date submitted3. Must begin with an introductory paragraph that has a succinct thesis statement.
4. Must address the topic of the paper with critical thought.
5. Must end with a conclusion that reaffirms your thesis.
6. Must document at least three, but no more than five sources in APA style, as outlined in the Ashford Writing Center.
7. Must include a separate reference page, formatted according to APA style as outlined in the Ashford Writing Center.
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