ACC 206 Week 5 Final Paper..doc
ACC 206 Week 5 Final Paper..doc PRG211
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Date Created: 11/11/15
Chapter 1: Overall Risk Profile of the Company: Overall risk profile of ABC Company based on current economic and industry issues that it may face are described below i. Adverse economic condition can affect the overall production condition of ABC Company. ii. If there is rise in the price in raw materials and factors of production it can affect the expansion of new products. iii. The product that will be developed will be new and other companies will take the benefit from the result experience and learning of development of new product. iv. There is risk of loss of key personnel at any time, political adverse change and potential natural disaster can harm the company production at any time adversely v. Different factors of porter five forces like rivalry among existing firms and threat of new entrants can make harmful effect any time on ABC Company. vi. Other factors of five forces bargaining power of buyers and sellers as well as threat of substitute products can create threat for ABC Company. vii. Different economic factors like inflation, reduction in per capita income, condition of GDP, GNP as well as condition of the company like employee condition, quality and efficiency of workers, internal economic policy of the company all these can create risk to the company as well as to the new project viability of the company. viii. Overall economic condition of US is not also well. Though it was the largest th manufacturer in the world but at present it is in 5 position. Import is much higher than export. The country is selling asset as well as taking debts to maintain current living standard. The international competitors are planning to make the country completely dependent on foreign production. As a result US firms are going to lose domestic self sufficiency, national security and leverage. This overall condition can be risky for ABC Company. Chapter 2: Current Company Cash flow: Sources and Uses of cash Flows: The calculation of ABC co.’s Cash Flow statement involves cash receipts and cash payments in three categories as, operating, investing, and financing activities. This calculation tells that the ABC Company enjoyed a cash flow provided from operations of about $3,500 in year 19X2. The statement also shows that ABC Company used more cash in investing activities than was provided from different sources. The net cash flows from ABC Company’s business were positive, $3,000. For ABC co. cash generated from operations is the primary source of cash flow, the company used the cash flow from operating and investing activities to make payment of dividends. (See appendix) Improvement of cash flow: To improvethe cash flows further, ABC Company can invest more in other firms’ securities like common stocks or debts to earn more cash proceeds in return. More common stocks can also be issued to collect funds to invest in more profitable sectors or to involve more production activities by expanding its manufacturing activities. Project financing: Full financing of this project cannot be done with the current level of cash flows generated from the company as the new project will need additional financing for raw materials to manufacture with more time. So more fund will be needed in the new project to be invested in and more labor force to produce effectively to supply in time delivery will also be needed. Additional financing: The company will need additional financing with internal financing. It can obtain the additional financing by either issuing equity or corporate debt. The choice of which security to sell at a particular time is contingent on a number of issues like, firms capital structure, current market condition, effect of taxes, the risk to the firm of excessive levels of debt, agency cost and the likely impact of the security’s issuance on existing stockholders. The firm can use debt financing if interest rates are viewed by the firm as being unusually low or high. In the current economy contest, the market is highly volatile and unpredictable;so it will be better for the companyto issue equity securities to avoid fixed payment of interest and avail floating payment. Moreover it provides more security than debt securities as it is more flexible than debt securities. Chapter 3: New Product Cost: The total production cost for the expansion product is $60000, for additional 5000 unit, and the per unit production cost for expansion product is $12 (as no fixed cost is required). Impact of expansion: By adding this new expansion product, it helps to absorb the fixed factory and sales expenses. The per unit production cost of current product was $9.73, before adding the new product. But the cost of new expansion product was higher than the cost of current product. Ultimately the addition of new expansion product with the current product causes the average total cost increase slightly to $10.067. Hence the total per unit cost of a current product and a new expansion product is $20.134, which makes the existing product cost $8.134/unit. So this expansion makes the existing product cheaper by $1.596. Selling price: If ABC Company wants a 40% gross margin for the new product, they should sell the new expansion product for $16.8per unit. Contribution margin and breakeven point: Assuming the same sales mix of these two products, the contribution margin of current production is $7.2 and the contribution margin of the total expected production (current + expansion) is $7.03 per unit, as shown in the following graph: Particulars current per unit expected per unit unit sold 84000 89000 Sales 1050000 12.5 1134000 12.74157 variable expense 462000 5.5 522000 5.86517 contribution 588000 7 611000 6.8764 margin The breakeven point occurs when: Sales – variable expense –fixed expense = 0 Or, $12.74157Q – $5.86517Q – $355750 = 0 Or, $6.8764Q = $355750 Or, Q = 51734.91 Figure break even quantity for ABC Company The above graph shows the break even quantity for ABC Company is 51735 units. Chapter 4: Potential Investments: NPV Calculation: The net present value of the proposed investment, ignoring income taxes and depreciation, is negative $1366.08. The calculation is presented below: Year Cost Saved Discounted cost saved 1 15000 13392.86 13000 10363.52 2 3 10000 7117.80 4 10000 6355.18 5 6000 3404.56 PV 40633.92 Initial investment 42000 NPV 1366.08 cost of capital 0.12 Impact of Depreciation: Assuming five year straight line depreciation, the impact is calculated below: Year cost saved Depreciation Reduction in fixed cost 001 15000 8400 6600 2 13000 8400 4600 3 10000 8400 1600 4 10000 8400 1600 5 6000 8400 2400 th The table shows how the factory’s fixed costs will be reduced every year except in the 5 year. So, the product costs will also bereduced by the investment over the five year period. The cash flow of ABC Company will be greatly affected by the investment. The CFs from operating activities as well as investing activities will increase. Acceptance of investment: The ABC Company should not purchase the equipment. Because, as we know from the time value concept that if the NPV of the investment is negative the project will not be accepted.So, though the investment has a positive impact on the cash flow of the firms as the form of cash flow from operating and investing activities the project should not be accepted as NPV is negative. The discounted present value of the equipment’s depreciation is much lower than the initial investment. Chapter 5: Conclusion Major Risk Factors: In this project some vital risk factors can be seen. Consumer’s commitment to the product of ABC is not secured at all. The company’s future growth forecasting is not supported by sufficient information and analysis. The assessment about the demand condition of both domestic and international is that the new expansion product is not properly cleared by proper analysis. The project involves both higher risks and return potential but as the firm is relatively small or medium sized the undertaking of increased risk will increase the firm’s risk exposure at a very high level. A higher price is required by the new product to earn anticipated amount of profit, so it incorporates risk of reduction in demand for the company’s product. There is also risk of rivalry among existing firms and new entrants to grab the market of ABC. Responsibility as the Controller and a management accountant: As the Controller and a management accountant I have the responsibility for the accounting functions and coordination of management’s participation in planning and controlling the attainment of objectives. I also have the responsibility to inform the management about the projects potentiality, to decide the way this project can be afforded, to provide details about the estimated product costs and returns from this project. Recommendation: So, as aController and a management accountant my advice to the CEO would be,the CEO should not go for the investment project as these projects is not so much potential to take the risk associated with it. The negative NPV reduces the attractiveness of the investment opportunity. So, new investment should not be made. But the ABC Company may go for the new expansion project as the target of growth can be reached through expansion. Moreover, the company can try to reduce the production cost of the new expansion products to charge a reasonably low price of the product to attract huge consumer demand and increase profit. Appendices: 1. The ABC company’s Financial Information regarding Balance Sheet items: ABC Company's current financial information (before/without expansion) Dec. 31,19X2 Dec. 31,19X1 Cash $ 12,000 $ 9,000 Accounts receivable (net) $ 12,000 $ 16,000 Merchandise inventory $ 35,000 $ 26,000 Property plant, & equipment $ 50,000 $ 40,000 Less: Accumulated depreciation $ (20,000) $ (12,000) Total assets $ 89,000 $ 79,000 Accounts payable* $ 30,000 $ 25,000 Income taxes payable $ 4,000 $ 1,200 Common stock $ 30,000 $ 30,000 Retained earnings $ 25,000 $ 22,800 Total liabilities & stock, equity $ 89,000 $ 79,000 2. The firm's accrualbasis income statement revealed the following data: Sales $ 120,000 Cost of goods sold $ 84,000 selling and administrative expenses $ 22,000 Depreciation expense $ 8,000 $ 2.800 Income taxes Dividends declared and paid during 19X2 $ 8,000 ABC purchased $20,000 of equipment for cash on September21. (There was no interest expense.) 3. The firm’s cash flow statement using the direct method: Cash flow statementdirect method 19X2 Cashflows from operating activities amount $ amount $ Cash receipt from customers 25000 Cash Paid to the suppliers 18700 Cash generated from operations 6300 Interest Paid 0000 Income Taxes paid 2800 Net cash flow from operating activities 3500 Cash flows from investing activities Proceeds from sale of assets 7000 Dividends received 500 Net cash flow from investing activities 7500 Cash flows from financing activities Dividends Paid 8000 Net cash flow from financing activities 8000 Net increase in cash and cash equivalents 3000 Cash and cash equivalents, beginning of the year 9000 Cash and cash equivalents, end of the year 12000 4. ABC Company’s income statement as on Dec 31 , 19X2: st Income Statement Particulars 19X2 sales 120000 less COGS 84000 Gross profit 36000 less S & A expenses 22000 operating income/ EBIT 14000 less income taxes 2800 Net income 11200 5. ABC's Product information:(D74*D76)+(E74*E76) Current Product Expansion Product (estimate) Selling Price 12.5 16..8 Units produced and expected to be sold 5,000 Machine Hours 5,000 Direct Materials $1.50 per unit $5.20 per unit Direct labor dollars needed per product $2.60 per unit $4.40 per unit Variable Factory Overhead $2.00 per Machine Hour $2.00 per Machine Hour Variable Selling Expense $0.40 per unit $0.40 per unit Total Fixed Costs: Fixed Factory Overhead $ 180,000 Fixed Selling expenses $ 175,750 6. Consolidated production cost current + expansion product total variable cost 522000 fixed factory overhead 180000 fixed selling expenses 175750 total production cost 855750 total unit produced 89000 per unit production cost 9.86235955 7. Production cost before consolidation produced unit current produced expansion product unit product Direct material 84000 126000 5000 26000 cost Direct labor cost 218400 22000 Factory overhead cost Machine hour 84000 Machine 10000 hour Selling expenses 84000 33600 5000 2000 total variable cost 462000 60000 per unit variable cost 5.5 12 fixed factory overhead 180000 fixed selling expenses 175750 total production cost 817750 per unit cost of production 9.73512 8. PV when straight line Depreciation for five years is considered Year DCF D Discounted D 1 13392.85714 8400 7500 2 10363.52041 8400 6696.428571 3 7117.802478 8400 5978.954082 4 6355.180784 8400 5338.351859 5 3404.561134 8400 4766.385588 pv 40633.92195 30280.1201
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