The newly develop plan will certainly bring new halogens for the company on the form of increased cost and labor; However it will also provide additional revenue and gross profit to help reach the growth targets. On this paper I would go over the details of the report made for the CEO that includes information on the overall risk profile based on actual market conditions, a current company cash flow, the product cost and any potential investments that might accelerate profits.
The Risk profile for this company includes several different factors that are mostly due to current market conditions, and the level of risk the company will ace by adding extra inventory and expenses. Unfortunately risk is a reality of doing business, whether the company is large or small, public or private, risk will always be present since nothing on the business world warrants a guarantee.
Some of the key risk points are: Inventory represents a big portion of the cash flow, therefore having extra inventory on hand will have an impact on the company’s future cash flow; payroll is also directly related to the cash flow since it takes a big portion of the monthly budget, therefore increasing the manufacturing capabilities of the factory as well as adding a new line of reduction will increase the payroll thus having an impact on cash flow reports; Economic downturn, that might affect prices of inventory to be purchased, therefore affecting the potential growth as well as having an impact on reaching forecasted company goals.
BBC Company’s current financial information (before/without expansion) Deck. 31,XX Deck. 31 , Cash 5,000 7,000 Accounts receivable (net) 12,000 18,000 Merchandise inventory 35,000 28,000 Property plant, & equipment $ 40,000 30,000 Less: Accumulated depreciation (17,000) (10,000) Total assets 75,000 73,000 Accounts payable* 25,000 21 ,oho
Income taxes payable 4,000 1 ,oho Common stock 24,000 Retained earnings 22,000 27,000 Total liabilities & stock, CEQ The firm’s accrual-basis income statement revealed the following data: Sales 120,000 Cost of goods sold 80,000 selling and administrative expenses Depreciation expense Income taxes 3,000 Dividends declared and paid during XX 10,000 BBC purchased $10,000 of equipment for cash on August 14.
Cash Flow ( Direct method) Cash received from customers 12000 less cash paid for: Inventory 63000 Salaries 46000 Rent 32000 Interest Other operating expenses 40000 Income Taxes 3000 184000 Net cash provided by operating activities (172000) What does this statement of cash flow tell you about the sources and uses of the company? The cash flow statement provides a view of the relationship between the income statement and the balance sheet, as per the information reflected on this statement, the sources of income come from regular sales and the sale of stocks. i. Is there anything BBC Company can do to improve the cash flow? The BBC company will be able to benefit and improve the cash flow by placing more stocks for sale, working towards reduction of inventory, selling some of the sets that are not directly linked to the ability of production by the company, and improving the collections method of the accounts receivable. Iii. Can this project be financed with current cash flow from the company? Why or why not?
Unfortunately the current cash flow from the company (-$172000) would not allow the financing of the future manufacturing addition, having to increase the inventory as well as the payroll among other expenses will undoubtedly increase the pressure on the firm towards reaching higher performing goals. Iv. If the company needs additional financing beyond what BBC Company can provide internally (either now or sometime throughout the life of the project), how would you suggest the company obtain the additional financing, equity or corporate debt, and why?
The best way of getting working capital for the BBC company will be by first offering stocks available to the public and private investors, second factor that can be used to the company’s advantage will be offering a percentage of equity on the company in return for a good investment that will guarantee the coverage of all future expenses and purchase of materials; lastly getting loans from lenders can be perhaps the last option available if the previous two don’t ark, since capital financed will incurred on the accumulation of interest.
Product cost: BBC Company believes that it has an additional 5,000 machine hours available in the current facility before it would need to expand. BBC Company Uses machine hours to allocate the fixed factory overhead, and units sold to allocate the fixed sales expenses. BBC Company expects that it will take twice as long to produce the expansion product as it currently takes to produce its existing product. Abs’s Product information Current Product Expansion Product (estimate) Selling Price $12. 00 $16. 80
Units produced and expected to be sold Machine Hours 40,000 Direct Materials $1. 30 per unit $5. 60 per unit Direct labor dollars needed per product $2. 80 per unit $4. 00 per unit Variable Factory Overhead $1. 00 per Machine Hour Variable Selling Expense $0. 20 per unit Total Fixed Costs: Fixed Factory Overhead 198,000 Fixed Selling expenses 191,250 What is the product cost for the expansion product? $48000 Assuming BBC Company wants a 40% gross margin for the new product, what selling price should it set for the expansion product? 16,80 Assuming the same sales mix of these two products, what are the contribution arising and break-even points by product? Variable Cost 80,000 per unit $12 40000 per unit $5. 30 Contribution Margin Breakable point 1600 units Potential investments to accelerate profit: BBC company has the option to purchase additional equipment that will cost about $42,000, and this new equipment will produce the following savings in factory overhead costs over the next five years: Year 1, $15,000 x 0. 82645 = 12,397 Year 2, $1 3,000 x 0. 9719= 10,363 Year 3, $10,000 7,118 year 4, $10,000 x 063552 – 6355 Year 5, $6,000 x 0. 56743 = 3405 $39,637 BBC Company uses the net-present-value method to analyze investments and series a minimum rate of return of 12% on the equipment. What is the net present value of the proposed investment ignore income taxes and depreciation? $2362. 42 Assuming a 5-year straight-line depreciation, how will this impact the factory’s fixed costs for each of the 5 years (and the implied product costs)? What about cash flow?
Straight line depreciation follows the principle of the purchase or investment price minus salvage value divided by time; thus assuming a 5 year depreciation formula, each year the company will be hit by a depreciation amount of $8,400 . The cash flow will systematically be affected each year, forever due to the new investment, new income will offset the loss. Considering the cash flow impact of the equipment as well as the time-value of money, would you recommend that BBC Company purchases the equipment? Why or why not?
Yes, the benefits offset the drawback, implementing the addition to the company will not only generate more income, but will also help the BBC company reach their pre-set goals. Conclusion: What are the major risk factors that you see in this project? The biggest risk that the BBC company might face will be the cash flow, as per the projections based n the current numbers and potential expansions, cash flow is already on the negative side; therefore implementing ways to generate cash on a permanent basis is crucial to the future SUccess of the company.
As the controller and a management accountant, what is your responsibility to this project? As a newly hired Controller my duties are to work together with the management team as well as the CEO towards the development of the new expansion as well as to oversee the day to day activities with the goal of increasing the overall productivity while working on the reduction of cost. What do you recommend the CEO do?