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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 skill set as well as the manufacturing facilities. ABC Company’s current financial information (before/without expansion) Dec. 31,19X2 Dec. 31,19X1 Cash $50,000 $70,000 Accounts receivable (net) $120,000 $180,000 Merchandise inventory $350,000 $280,000 Property plant, & equipment $400,000 $300,000 Less: Accumulated depreciation $(170,000) $(100,000) Total assets $750,000 $730,000 Accounts payable $250,000 $210,000 Income taxes payable $40,000 $10,000 Common stock $240,000 $240,000 Retained earnings $220,000 $270,000 Total liabilities & stock,equity $750,000 $730,000 The firm’s accrual-basis income statement revealed the following data: Sales $1,200,000 Cost of goods sold $800,000 selling and administrative expenses $250,000 Depreciation expense $70,000 Income taxes $30,000 Dividends declared and paid during 19X2 $100,000 ABC purchased $100,000 of equipment for cash on August 14. (There was no interest expense.) 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: 1. What does this statement of cash flow tell you about the sources and uses of the company? 2. Is there anything ABC Company can do to improve the cash flow? 3. Can this project be financed with current cash flow from the company? Why or why not? 4. 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. ABC Company expects that it will take twice as long to produce the expansion product as it currently takes to produce its existing product. 1. What is the product cost for the expansion product? 2. 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? 3. Assuming ABC Company wants a 40% gross margin for the new product, what selling price should it set for the expansion product? 4. 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. 1. What is the net present value of the proposed investment ignore income taxes and depreciation? 2. 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? 3. 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? 4. What are the major risk factors that you see in this project? 5. As the controller and a management accountant, what is your responsibility to this project? 6. What do you recommend the CEO do?
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