ABC Company
Cash Flow statement (Direct Method)
Dec 31,2002
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Cash Flows from operating Activities
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Received From customers
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1260000
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Paid to suppliers
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830000
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Paid for expenses
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250000
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Paid for taxes
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0
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Cash flow from operating activities
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180000
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Purchase of fixed Assets
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100300
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Cash used in investing activities
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100000
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Paid for dividends
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100000
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Cash used in financing activities
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100000
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Overall change in cash flows
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-20000
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Opening Balance of cash
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70000
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Ending balance of cash
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50000
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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 timeintensive 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 eightpage 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.
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 breakeven points by product?
ABC Company's current financial information (before/without expansion)
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Dec. 31,20X2
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Dec. 31,20X1
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Cash
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$ 50,000
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$ 70,000
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Accounts receivable (net)
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$ 120,000
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$ 180,000
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Merchandise inventory
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$ 350,000
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$ 280,000
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Property plant, & equipment
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$ 400,000
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$ 300,000
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Less: Accumulated depreciation
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$ (170,000)
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$ (100,000)
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Total assets
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$ 750,000
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$ 730,000
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Accounts payable
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$ 250,000
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$ 210,000
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Income taxes payable
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$ 40,000
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$ 10,000
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Common stock
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$ 240,000
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$ 240,000
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Retained earnings
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$ 220,000
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$ 270,000
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Total liabilities & stock, equity
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$ 750,000
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$ 730,000
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The firm's accrual-basis income statement revealed the following data:
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Sales
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$ 1,200,000
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Cost of goods sold
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$ 800,000
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selling and administrative expenses
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$ 250,000
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Depreciation expense
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$ 70,000
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Income taxes
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$ 30,000
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Dividends declared and paid during 20X2
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$ 100,000
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