ABC Company's current financial information (before/without expansion)

Dec. 31,19X2

Dec. 31,19X1

Net Change

Cash

$ 50,000

$ 70,000

Accounts receivable (net)

$ 120,000

$ 180,000

$ (60,000)

(50,000)

Merchandise inventory

$ 350,000

$ 280,000

$ 70,000

$ 60,000

Property plant, & equipment

$ 400,000

$ 300,000

$ 100,000

$ 40,000

Less: Accumulated depreciation

$ (170,000)

$ (100,000)

$ (70,000)

$ (70,000)

Total assets

$ 750,000

$ 730,000

Accounts payable

$ 250,000

$ 210,000

$ 40,000

$ 70,000

Income taxes payable

$ 40,000

$ 10,000

$ 30,000

Common stock

$ 240,000

$ 240,000

$ -

Retained earnings

$ 220,000

$ 270,000

$ (50,000)

Total liabilities & stock, equity

$ 750,000

$ 730,000

50,000

$ 60,000

The firm's accrual-basis income statement revealed the following data:

Sales

$ 1,200,000

$1,260,000

Cost of goods sold

$ 800,000

$ 830,000

selling and administrative expenses

$ 250,000

Depreciation expense

$ 70,000

Income taxes

$ 30,000

Dividends declared and paid during 19X2

$ 100,000

Equipment

$ 100,000

$ (50,000)

ABC purchased $100,000 of equipment for cash on August 14.

(There was no interest expense.)

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ABC Company
Statement of Cash Flows
For the year ended December 31, 19X2
Cash flow from operating activities:
Cash received from customers					$ 1,260,000
Less cash paid for:
Inventory				$ 830,000
Selling and administrative expenses				250,000	(1,080,000)
Net cash provided by operating activities					$ 180,000
Cash flow from investing activities:
Purchase of equipment				(100,000)
Net cash used by investing activities					(100,000)
Cash flow from financing activities:
Dividends paid				(100,000)
Net cash used by financing activities					(100,000)
Net increase in cash					$ (20,000)
Cash balance at January 1, 19X2					70,000
Cash balance at December 31, 19X2					$ 50,000

ABC's Product information
	Current Product	Expansion Product (estimate)
Selling Price	$14.50	29.08
Units produced and expected to be sold	80000	5000
Machine Hours	40000	5000
Hours per unit	0.5	1
Direct Materials	1.30	5.60	per unit
Direct labor dollars needed per product	2.80	4.00	per unit
Variable Factory Overhead	1.00	1.00	per machine hour
Variable Selling Expense	0.20	0.20	per unit
Fixed Factory overhead	4.95	4.40	per unit
Fixed Selling expense	2.39	2.25	per unit
COST	12.14	17.45
Total Fixed Costs:	Current Only	W/ New	Savings
Fixed Factory Overhead	$ 198,000	176,000	22,000
Fixed Selling expenses	$ 191,250	180,000	11,250
			33,250
Difference in cost	Current Product
Selling Price	$14.50
Units produced and expected to be sold	80000
Machine Hours	40000
Direct Materials	1.30
Direct labor dollars needed per product	2.80
Variable Factory Overhead	1.00
Variable Selling Expense	0.20
Fixed Factory overhead	4.40
Fixed Selling expense	2.25
COST	11.45
Savings per Unit	0.69
Youve 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 hes 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 ABCs 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. Final Paper Spreadsheet 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 youve 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 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. a. What is the product cost for the expansion product? 29.08 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 factorys 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. Students name c. Course name and number d. Instructors name e. Date submitted 3. 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 all sources in APA style, as outlined in the 7. Must include a separate reference page, formatted according to APA style as outlined in the