ABC Corporation - Corporate Controller

ABC Company desires to maintain an aggressive target by growing its current sales from $1.2 million which represents a 25% increase from the previous year's. The company intends to grow its sales volume to $3 million in three years. Achieving the said targets requires that the company includes additional ‘products in its portfolio to benefit from the current production capacity and manpower. The facility has skilled employees, adequate facility and 5000 machine hours that can be used to produce cedar dollhouse using shingles scrap materials. The new product line will increase the raw materials but is more time intensive. The new product will also provide additional revenues as well as gross profits that will boost the growth of ABC. An evaluation of the proposed project needs to be conducted to inform the decision on whether to invest in the proposed product or if a new investment option should be determined. The selected investment must be viable and profitable to the company. It must help to achieve the aggressive targets as laid down by the management. In order to undertake this project, it is desirable to conduct an analysis to establish how the new product line will be afforded. It is, therefore, necessary to consider the product costs, the breakeven point and the expected returns of a project. 

2. Risk Profile 

The cedar roofing is environmentally friendly, repairable and weather resistant. The products are harvested from salvage logging and therefore save on additional logging. The logs are usually left in the forests once the loggers obtain the desired part of a tree. The parts are usually unusable and left in the forest to decay. Cedar does not decay and therefore allows ABC to make use of the natural resource which could otherwise be left in the forest for years. Cedar roofing is resistant to damage from hail. They can also withstand the impact of other free falling objects and have better resistance than roofing tiles. The products are easy to replace once they are damaged and there is no fear about color lots or even being concerned about chipping the surface coating. The products weather in six to nine months to a gray color. It is also expected that the products will split and shake with time. The cedar shingle roof has three-ply systems having three layers of shingles and therefore there is no cause for alarm for the natural splits. Despite withstanding the hailstorms, the cedar is also resistant to wind and fire especially for fire retardant (Berk & DeMarzo, 2016). 

The introduction of the new product by the company needs to consider the risks that might affect the investment in the new product. The company should understand the influence of the internal and external environment and how it can influence its prospects for growth. The company boasts strong sales growth and a dynamic management team that desires to achieve high results. Similarly, it is interested in recycling products and increasing its sources of raw materials. The external environment, however, needs to be considered. The availability of competing products, high production cost, and an expensive labor force complicates the competitive environment of the company (Berk & DeMarzo, 2016). 

The industry is exposed to strong competition from other products including tiles, metal, asphalt and other roofing materials. The competition calls for the development of appropriate strategies that can be used by the company to continue operating into the foreseeable future. The company however benefits from reduced taxes and a stable market driven by customer demands, past experiences and positive outcome from previous works. More house owners are shifting to cedar roofing and this is likely to drive sales as construction companies prefer using cedar for roofing and side walling. Such positive market responses create an opportunity for the company to expand its operations to capture the growing demand. The positive outlook is expected to continue driven by a growing demand for cheaper housing and more environmentally friendly material. The reuse of the cedar makes them a preferred option as they do not contribute to environmental degradation. The economic condition is poised to improve in the future as the economy remains resilient to economic pressure while showing signs of improving. The company is however faced by expensive labor force and high product cost. Such factors reduce its margins and affect its ability to invest in new technologies. Similarly, the industry is marred by accidents and damaged products during loading, transportation and offloading. Inexperienced workers affect the quality of the houses by using the products inappropriately which leads to breakages or customer complaints or even leakages (Berk & DeMarzo, 2016). 

3. Cash flow statement 

Operating Activities  Receipts from customers  Paid to suppliers  Expenses  Taxes  Cash flow from operating activities	1,260,000  830,000  250,000  0  180,000
Investing Activities  Fixed asset  Cash flow from Investing Activities	(100,000)  (100,000)
Financing Activities  Dividends  Cash flow from financing Activity	(100,000)  (100,000)
Overall change in cash flows  Beginning balance  Ending balance	(20,000)  70,000  50,000

From the cash flow statement, the company recorded reduced cash inflows which affected its cash flows for the current year. The reduction led to an overall negative cash flow for the company. The reduction, therefore, affected the ending balance which declined by 20,000 compared to a positive value in the previous year. The investing and financing activities recorded negative cash flows affecting the cash flows from operations which were positive (Milis, Snoeck & Haesen, 2009). 

Most of the cash flow from the company is from operating activities. Operations reported $180,000 compared to investing and financing which reported $-100,000 each. The negative figure was as a result of the investment in fixed asset and payment of dividends to the shareholders. The company obtains most of its cash from sales and there are no external sources of funds. The cash flow statement shows that receipts from customers are the only source of funds. There are no borrowed funds or disposal of assets in the course of the year. 

ABC Company should reduce its operating expenses and improve its sales to boost its current cash flows which are declining. Similarly, the company can obtain funds from external sources to finance its activities and for investment purposes. Additionally, it can sell some of its assets to generate additional cash if the productive life of the asset is over or if they no longer generate revenues for the company. Another way that the company can raise additional cash is by selling some of its shares to the public. 

The current Project can be financed from the current cash flows from the company. The company has a closing balance of $50,000 which can be used to finance the current project. However, doing so will tie more funds in the new project affecting the company’s ability to meet its current obligations when they fall due. It is therefore not prudent to finance the project using the current cash balance as it will affect future cash needs of the company making it hard to continue with its operations. 

Future cash needs should be financed using corporate debt as it is cheaper and easier to obtain. It will help the company to meet its current cash needs without affecting the current cash flows. Similarly, the interest paid for the debt is likely to be lower than the current rate of return expected by the management. Similarly, it will allow for management control by avoiding the dilution of shares in the company, therefore, ensuring that the control of the company remains the same. Borrowing is ideal for the company as its current capital structure has more of owners equity with no debt financing which can help the company to generate additional income by investing in high return project. The return from such projects should be more than the interest paid for the loan (Sims, Powell & Vidgen, 2015). 

4. Product Cost 

Absorption costing and Variable Costing 

Direct materials 5.6 

Direct labor per product 4 

Variable factory overhead 1 

Fixed overhead 4.4 

Product cost per unit 15 

Variable costing 10.6 

Adding the new expansion 

In order to determine the effect of the expanding the product line, it is necessary to compare the fixed costs before the expansion and after the expansion. A change in the fixed cost will affect the expenses of the company. The existing product will be cheaper is the fixed costs are lower after the expansion than before. The fixed cost after expansion is subtracted from the fixed cost before the expansion to determine how cheaper the existing product will be. 

Fixed cost before expansion 2.475 

Fixed cost after expansion 2.2 

Products will be cheaper by 0.275 

Selling Price if the New Product 

To maintain a gross margin of 40%, the company must set its selling price at 100/60*15 

Selling price per unit 25 

Contribution margin and B/E POINT Using the Same Sales Mix 

	Existing (000)	New (000)	Total (000)
Sales  Less Variable cost  Contribution margin	1160  384  776	125  54  71	1285  438  847
Contribution margin ratio  Breakeven point Total  Product Breakeven point	533.093	57.445	0.66  590.539

5. Potential Investment 

Net Present value 

Year	Cash flows	PV interest factor	Discounted Cash flows
0	(42,000)	1	(42000)
1	15000	0.8929	13392.86
2	13000	0.7972	10363.6
3	10000	0.7118	7118
4	10000	0.6355	6355
5	6000	0.5674	3404.4
NPV			(1366.14)

Five-year straight-line depreciation will influence the fixed costs of the factory by reducing savings in fixed cost by $42,000/5 = $8,400 each year. In the fifth year, the product cost is likely to increase as the savings will be less than $8,400. Lack of taxation will not affect the cash flows as these can only be affected if there is a tax shield from depreciation. 

From the net present value calculation, the equipment should not be purchased as it contributes to negative cash flows. The time value of money places more emphasis on money in the present which is worth more than a similar amount in future. The difference arises from the influence of inflation and the earnings that could be made in the intervening period using the money. The expected return of 12% therefore accounts for the differences in the present amount and the future cash flows. The equipment has an NPV of -1366.14 which is not ideal for investment purposes. The cash inflows over the five years are less than the cash outflow. The investment will lead to a net loss for the company as the projected earnings based on the expected returns will be less than the anticipated cost (Sims, Powell & Vidgen, 2015). 

6. Conclusion 

Some of the risks involved include competition, high production cost, and expensive labor force. The industry is marred by accidents and damaged products during loading, transportation and offloading. Inexperienced workers affect the quality of the houses by using the products inappropriately which leads to breakages or customer complaints or even leakages. Such factors are likely to affect the productivity of the company and its ability to realize its targeted growth. As a controller and management accountant, the biggest responsibility is to evaluate projects and establish their viability and whether the company should continue with its investment or if it should seek alternative investment options. From the current analysis, the viability of the project was analyses and varying results obtained that informed the conclusion as to whether the investment should go on or not. The new product for example can help the company use its excessive working hours and available facilities and employees. Similarly, it positively affects the fixed costs of the company. Additionally, it raises the revenues for the company which can help it achieve its desired target. However, the company should not invest in the new equipment as it contributes to negative net present value. Based on the analysis, the company should go ahead and invest in the new product. 

References 

Berk, J., & DeMarzo, P. (2016).  Corporate Finance, Global Edition . Harlow, United Kingdom: Pearson Education Limited. 

Milis, K., Snoeck, M., & Haesen, R. (2009). Evaluation of the Applicability of Investment Appraisal Techniques for Assessing the Business Value of is Services.  SSRN Electronic Journal . doi: 10.2139/ssrn.1517656 

Sims, J., Powell, P., & Vidgen, R. (2015). Investment appraisal and evaluation: preserving tacit knowledge and competitive advantage.  International Journal Of Business And Systems Research ,  9 (1), 86. doi: 10.1504/ijbsr.2015.066822