ABC Company Final - Assignment Example

? Final Paper: ABC Company Analysis Cedar roofing and siding shingles are common globally because of their attractiveness and beauty they bring to homes. This reason makes them a commodity that is widely sort after contributing to its high demand by new homeowners as well as construction companies. In the US alone there are, several companies dealing with the same product of Cedar roofing and siding shingles. Therefore, ABC Company has a large market to supply to raising its market share although in a very competitive market. ABC Company is a company that specializes in making cedar roofing and siding shingles. It has a 25% sales margin and has a growth target of three million in the next three years. Besides the competition, the demand for roofing sidings and shingles remains high because of the high rate of forthcoming real estate ventures. Apart from facing competition generated by several other companies, dealing with cedar in production of roofing and siding shingles, ABC tends to, also face high competition resulting from products manufactured using iron and clay, companies that operate in the same market. The prevailing fact is that, cedars products have do have a higher competitive gain over similar products that are made of iron and clay. There is also a little disadvantage of cedar roofing and siding products, the prices tend to be too high thus scaring away potential customer, who resolves to cheaper iron products. ABC Company has a high chance of maintaining its development with minimal deviation from either downwards or upwards. The deviations could be because of the tough economic patterns forcing many homeowners who would prefer cheaper clay or iron products or clay products that are meant for their roofing and siding. These preservation policies are in turn indicating the cost of raw materials required in manufacture of for cedar roofing tiles to a bit more expensive. Engaging into a new project like the one suggested for building the dollhouse might lead to a viable solution to the company towards solving the means to reach its target next 3 years goal of $3. With this product, even with rise in operation costs and financing costs will generate more income hence increase on profits. In this paper, there is the identification of risk, statement of cash flows, product costing and investment decisions for the company. I. Risk profile for ABC Company A risk profile evaluates an organization willingness to take risks as well as the threats to which an organization is exposed. Acceptable level of risk With a target growth of 3000,000, in the next three years, the risk associated with the growth should be laid out. The risk in introduction of a new product should also be included to ascertain the amount of risk ABC Company can take. As much as expansion comes to pave way for leverage on the skill in employees and the state of their manufacturing facilities, the risk involved should be evaluated to see whether the expansion will reduce or increase current risk. Possible threats One of the biggest threats will include competitors. The question here is; how much risk is already there and in presence of competitors, how much are they willing to expand or change to gain more consumers? The answer will be found once they evaluate risk associated with competition Another threat is that of trying to find additional products to leverage on their employee skill set and manufacturing facilities. Introduction of the products depends on probability, which in itself has high risk. The skill set and manufacturing facilities are certain Key risk areas The company’s has had a profit increase of 25% from the previous year. They will have to maintain of better that outcome and with the introduction of a new idea will increase on costs. They have to ensure their cash flow is on a positive trend. This will ensure positive cash flows that will encourage investment. In addition, another key risk area is on the financing of the project. They have to ensure that they pick the best option concerning the firm. Options available are equity financing and debt financing. Capacity to manage risks In ABC Company, their cash inflows are more positive and can be held as assurance for lower risk even with the high returns. There is also assurance that the new product will increase in flows even with more expenses thus reducing their associated risk. In addition, they should ensure that in product costing, they are able to cover even the risks involved in the current processes and in expansion. II. Current company cash flow Cash flow = cash inflows - cash outflows In ABC company, the cash flow is calculated as follows = In flows ABC cash flow statement For the year ended 31st December 2002 Cash receipts From customers Net sales add beginning accounts receivable Less ending accounts receivable = $ (1,200,000 + 70,000) - $ 50,000 = $ 1,220,000 Cash payments made to supplier’s purchases added Ending inventory less beginning inventory add Beginning accounts payable less ending accounts Payable = $ (800,000 + 0 + 210,000) = $ (760,000) Income tax beginning income tax payable less Ending tax payable add tax expense = $ (10,000 + 30,000) - $ 40,000 = $ 0 The current cash flow for the company results to = $ 1,220,000 – $ 760,000 + $ 0 = $ 460,000 Question i: Using the statement of cash flows for the ABC Company, the sources of cash inflows include sales, accounts receivables, and investment on assets. The uses of the cash inflows in the company include purchase of stock, pay out of trading expenses and tax burdens. They are clearly laid out. Both the sources and the uses are not ambiguous but I would suggest that the firm could use more in flows to allow for more investment. Other than that, since ABC Company is bringing more cash than it spends, we can consider the company of good value. Question ii: To increase on cash flow for the company, ABC will need to increase more on the investment section. More investment will lead to more gain or profit hence higher cash flows. Besides increasing its investment, the company can also increase its cash flow by implementing a policy or a system that will ensure faster clearance of accounts receivable. Question iii: Yes. The project can be financed with the current cash flow. Though it may be not entirely enough it could act as startup capital whereas they look for additional capital investment. The expansion is a huge investment and more funds or resources are needed to finance it to ensure its success. Question iv: I would suggest equity financing. Equity market is the market for trading equity instruments. Equity financing has the following advantages over debt financing. Equity financing will allow ABC Company acquires funds often for investment without incurring debt. On the other hand, issuing a bond does increase the debt burden of the bond insurer because contractual interest payments must be paid. However, unlike dividends they cannot be reduced or suspended. III. Product costing a) Absorption costing variable costing Direct materials $ 104,000 $ 104,000 Direct labor $ 224,000 $ 224,000 Variable manufacturing overheads $ 80,000 $ 80,000 Fixed manufacturing overheads $ 198,000 - Unit product cost $ 606000 $ 408000 Absorption = 606000 / 80000 = 7.575 Variable costing = 408000 / 80000 = 5.1 b) Through the expansion Direct materials (85000 units each at 5.6) = $ 476000 Direct labor (85000 units each at 4) = $ 340000 Variable factory overhead (85000 units each at 1) = $ 85000 Variable selling overheads (85000 units@ 0.2) $ 17000 $ 918000 Unit product cost = 918000 / 85000 = $ 10.8 c) Gross margin 40% Sales / gross profit Sales = 1200000 / gross profit = 0.4 Gross profit = 480,000 120000 + 480,000 = 1680000 1,200,000 = 7.575 1.680,000 = 10.8 IV. Potential investments to accelerate profit 1. Net present value of the new equipment Year 1 = 15000 / 1.12 = 13392.86 Year 2 = 13000 / 1.2544 = 10363.52 Year 3 = 10000 / 1.4049 = 7117.95 Year 4 = 10000 / 1 .5735 = 6355.26 Year 5 = 6000 / 1.7623 = 3404.64 Straight-line depreciation is the greatest used depreciation technique by majority business for carrying out financial accounting. The technique dispenses the expense of an asset into equal values for the entire life span of the asset (Merrit, 2013). It is also important to note that straight-line depreciation has equal expense distribution for every year of the venture’s life cycle; therefore, it can be considered as a fixed cost. With time it reduces the worth of a fixed asset, thus it is considered an expense. For the case of products variable costs, depreciation does not affect them since it is a fixed cost; however, it affects the average cost of the product since it is incorporated in the fixed costs. Application of this also happens with profit, because the depreciation expense is usually distributed yearly; thus reducing the profit for each year by a uniform amount. For depreciation cash does not need to be spent (Merrit, 2013). Thus, the depreciation only moves the profit for each year and does not touch on the cash. From this, it is irrelevant to highlight depreciation on cash flow statements. I would recommend ABC to purchase the equipment. Basing on the time value of money the net present value for the equipment shows a positive trend. This means that the inflows generated by the equipment exceed the out flows; therefore, the equipment adds significant value to the shareholders. V. Conclusion Risks involved with the project include the type and amount of financing it will require. With a set target by the company, there is an aim that is meant to be attained without a decline in future profits. Therefore, the financing should be done with precise care in consideration with risks involved in the expansion process. Another is that of future cash flows in relation to expansion. One thing is for sure, the cash flows will be positive but they will need to increase to attain the main goal of the project that is to lower costs and increase in flows. Therefore, the best advice for the CEO is to adopt the project. The project is potentially able to help the company raise its cash flows thus making sure the company attains its goal by having low costs and higher inflows. References Brimson, J. A., 1991, Activity Accounting: An Activity-Based Costing Approach, Wiley, New York. Clark, F. D., 1997, Applied Cost Engineering, 3rd ed., Mercel Dekker, New York. Merrit , C. (2013). The Straight-Line Depreciation Method & Its Effect on Profits. Retrieved from Business and Entrepreneurship: http://yourbusiness.azcentral.com/straightline-depreciation-method-its-effect-profits-9166.html Zhang, Y. F., Fuh, J. Y. H., and Chan, W. T., 1996, “Feature-Based Cost Estimation for Packaging Products Using Neural Networks”, Comput Ind. pp. 95–113. Read More