Focus of the Final Paper You’ve just been hired onto ABC Company as the corporate controller....

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Focus of the Final Paper      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 $1.2 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 XXXXXXXXXXAs 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 XXXXXXXXXXFinal 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 XXXXXXXXXXa. You need to complete a cash flow statement for the company using the direct method XXXXXXXXXXb. Once you’ve completed the cash flow statement, answer the following questions: XXXXXXXXXXi. What does this statement of cash flow tell you about the sources and uses of the company funds? XXXXXXXXXXii. Is there anything ABC Company can do to improve the cash flow? XXXXXXXXXXiii. Can this project be financed with current cash flow from the company? Why or why not? XXXXXXXXXXiv. 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. Based 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 XXXXXXXXXXa. What is the product cost for the expansion product under absorption and variable costing? XXXXXXXXXXb. 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? XXXXXXXXXXc. Assuming ABC Company wants a 40% gross margin for the new product, what selling price should it set for the expansion product? XXXXXXXXXXd. 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, XXXXXXXXXXYear 2, $13, XXXXXXXXXXYear 3, $10, XXXXXXXXXXYear 4, $10, XXXXXXXXXXYear 5, $6, XXXXXXXXXXABC Company uses the net-present-value method to analyze investments and desires a minimum rate of return of 12% on the equipment XXXXXXXXXXa. What is the net present value of the proposed investment (ignore income taxes and depreciation)? XXXXXXXXXXb. 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? XXXXXXXXXXc. 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: XXXXXXXXXXa. What are the major risk factors that you see in this project? XXXXXXXXXXb. As the controller and a management accountant, what is your responsibility to this project? XXXXXXXXXXc. What do you recommend the CEO do?

Robert · Accepted Answer

ABC LIMITED
Risk and Financial analysis
I. 
INTRODUCTION 
In the present assignment we have analyzed ABC Company on different perspectives in 
order to help the CEO to come up with new plans which would help the company in expanding. 
ABC Company specializes in manufacturing of cedar roofing and siding shingles and is currently 
making annual sales of $1.2 million approximately which is 25% higher from the last year. 
Company is targeting $3 million annual sales within next 3 years. In order to achieve $3 million 
Sales, Company have to add new products to its existing product lines. CEO has been trying to 
find additional products which can help company to raise its revenue and at the same time 
leverage skillset of the existing employees and manufacturing facilities.  
CEO has been working upon a new product known as “Cedar Dollhouse”, this product 
will utilize the shingle scrap material together with other raw materials. Producing “Cedar 
Dollhouse” requires additional raw material, also this additional product will consume 
substantial time of the employees and workers. Cedar Dollhouse will help the company to 
leverage its manufacturing facilities and current staff, by the help of this product the revenue is 
estimated to increase substantially along with the expenses. We have analyzed the proposal 
further to determine, if this product can help the company to reach its target.
RISK PROFILE 
Company is planning to add a new product to their existing line of products; therefore it 
must assess the risks involved in it. Majorly there are two types of risks which are involved in 
here and they are known as finance risk and business risks. 
Business risk is mostly associated with the strategic decisions which are required so that 
the organization can work smoothly and profitably whereas finance risk is associated with the 
monetary aspects of an organization such as its capital structure etc. In order to excel the market 
every entrepreneur must manage both these risks very well by using various risk management 
techniques. 
Business risk can be defined as the risk that the core business activities of a ABC 
company are not appropriate such as inefficient supply chain management system, inaccurate 
pricing of products which will bring down the demand of the product, ineffective production 
processes etc. These risks directly impact ABC Company as they are involved in day to day 
working of an organization. On the other hand Finance risk can be defined as the risk which is 
mainly associated with the capital structure of the ABC company, if ABC is carrying to much 
debt than in such case liability of repayment and interest costs are also high which makes the 
organization vulnerable to credit risk. 
In order to overcome various business risks faced by the company it must determine 
which business strategy it must use. There are majorly three types of strategies which can be 
used low cost leadership, differentiation, and focus strategies. 
The low cost leadership strategy is the ability of a company to design, produce, and 
market a product more cost efficiently than its rival firms. 
The differentiation strategy is the ability of a company to market a superior and 
differentiated product/service to the buyers with respect to the quality, add-on features or after-
sales services. 
The focus strategy uses both the cost leadership strategy and the differentiation strategy. 
But the primary focus is on a narrow/niche market. The strategies are known as cost focus and 
differentiation focus respectively. 
Apart from this company must also use the financial risk management techniques such as 
planning appropriate capital structure, hedging exchange rate risk and interest rate risk.
II. Current Company Cash Flow 
a)  
ABC COMPANY 
Cash Flow Statement  
For the year ended 31
st
 Dec, 19x2 
(Direct Method)
   Particulars     Amount 
Cash from Operating Activities: 
Cash Received from customers (w.n.1)    $1,260,000 
Cash Paid to Suppliers and Employees (w.n.2)   $1,080,000 
Cash Generated From Operations     $180,000 
Less: Income Tax Paid                   -        
Cash Flow before Extra ordinary Items    $180,000
Cash Flow From Investing Activities: 
Puchases of Equipment      $(100,000)
Cash Flow From Financing Activities: 
Dividend Declared       $(100,000)
Net Increase/Decrease in Cash and Cash Eqivalents:  $(20,000) 
Cash and Cash Equivalents As at beginning of the year  $70,000 
Cash and Cash Equivalents As at End of the year  $50,000
Working Note: 
1.

Focus of the Final Paper 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...

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