Reference no: EM13841375

ABC Company

Cash Flow statement (Direct Method)

Dec 31,2002

Cash Flows from operating Activities
Received From customers		1260000
Paid to suppliers		830000
Paid for expenses		250000
Paid for taxes		0
Cash flow from operating activities		180000
Purchase of fixed Assets	100300
Cash used in investing activities		100000
Paid for dividends	100000
Cash used in financing activities		100000
Overall change in cash flows		-20000
Opening Balance of cash		70000
Ending balance of cash		50000

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)

	Dec. 31,20X2	Dec. 31,20X1
Cash	$ 50,000	$ 70,000
Accounts receivable (net)	$ 120,000	$ 180,000
Merchandise inventory	$ 350,000	$ 280,000
Property plant, & equipment	$ 400,000	$ 300,000
Less: Accumulated depreciation	$ (170,000)	$ (100,000)
Total assets	$ 750,000	$ 730,000
Accounts payable	$ 250,000	$ 210,000
Income taxes payable	$ 40,000	$ 10,000
Common stock	$ 240,000	$ 240,000
Retained earnings	$ 220,000	$ 270,000
Total liabilities & stock, equity	$ 750,000	$ 730,000

The firm's accrual-basis income statement revealed the following data:

Sales	$ 1,200,000
Cost of goods sold	$ 800,000
selling and administrative expenses	$ 250,000
Depreciation expense	$ 70,000
Income taxes	$ 30,000
Dividends declared and paid during 20X2	$ 100,000