Financial Analysis and Risk Assessment for ABC Company's New Product Line Expansion

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Financial Analysis and Risk Assessment for ABC Company's New Product Line ExpansionQuestion:You’ve just been hired onto ABC Company as the corporate controller. ABC Company is a manufacturingfirm that specializes in making cedar roofing and siding shingles. The company currently has annual sales ofaround $1.2 million, a 25% increase from the previous year. The company has an aggressive growth targetof reaching $3million annual sales within the next 3 years. The CEO has been trying to find additionalproducts 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 workingon. The CEO would like to use the some of the shingle scrap materials to build cedar dollhouses. While thisnew product line would add additional raw materials and be more time-intensive to manufacture than thecedar shingles, this new product line will be able to leverage ABC’s existing manufacturing facilities as wellas the current staff. Although this product line will require added expenses, it will provide additional revenueand gross profit to help reach the growth targets. The CEO is relying on you to help decide how this projectcan be affordedProvide details about the estimated product costs, what is needed to break even on theproject, 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 followinginformation (including exhibits, but excluding your references and title page). Refer to the accompanyingExcel spreadsheet (available through your online course) for some specific cost and profit information tocomplete the calculations.Final Paper SpreadsheetI. An overall risk profile of the companybased on current economic and industry issues that it may befacing.II. Current company cash flowa. 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 nowor sometime throughout the life of the project), how would you suggest the company obtain the additionalfinancing, equity or corporate debt, and why?III. Product cost: ABC Company believes that it has an additional 5,000 machine hours available in thecurrent facility before it would need to expand. ABC Company uses machine hours to allocate the fixedfactory overhead, and units sold to allocate the fixed sales expenses. Bases on current research, ABCCompany expects that it will take twice as long to produce the expansion product as it currently takes toproduce 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 muchcheaper 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 setforthe expansion product?d. Assuming the same sales mix of these two products, what are the contribution margins and break-evenpoints by product?IV. Potential investments to accelerate profit: ABC company has the option to purchase additional equipmentthat will cost about $42,000, and this new equipment will produce the following savings in factory overheadcosts over the next five years:Year 1, $15,000Year 2, $13,000Year 3, $10,000Year 4, $10,000Year 5, $6,000

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