Financial Analysis and Risk Assessment for ABC Company's New Product Line Expansion
A financial analysis and risk assessment for a company's product expansion.
Chloe Martinez
Contributor
4.2
55
30 days ago
Preview (3 of 9)
Sign in to access the full document!
Financial Analysis and Risk Assessment for ABC Company's New Product Line Expansion
Question:
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.
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.
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 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
Question:
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.
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.
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 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
Preview Mode
Sign in to access the full document!
100%
Study Now!
XY-Copilot AI
Unlimited Access
Secure Payment
Instant Access
24/7 Support
Document Chat
Document Details
Subject
Finance