ABC Company Cost Analysis
September 1, 2014
ABC Company Cost Analysis
This analysis will examine whether or not adding cedar doll houses to its product line will be both profitable and cost effective. Additionally, it will conduct a risk assessment evaluation of the new product line by examining the direct effect it has on the company’s cash flows. In order to help the CEO arrive at an informed decision, product costs, potential revenues, break-even points and level of return will be examined. Following the assessment, a recommendation will be made that summarizes the overall profitability and level of return this venture will have.
Initially, ABC Company will incur various economic risks from raw material pricing to labor. “The determination of anticipated volume should be based on prior sales patterns, economic conditions, competitive actions, and so forth. Where a company has multiple products, consideration must be given to each,” (Aguiar, 2012). As such, should a rise in raw material cost become a factor then expenses associated with production might pose a problem. Additionally, environmental and regulatory concerns must be assessed as with likewise competition. In order to properly evaluate the competition, a thorough market analysis should be completed. ABC Company needs to be aware of its competition and any potential harm it may possess. According to a model originated from Michael E. Porter’s 1980 book Competitive Strategy: Techniques Companies Use, Weber, W., & Polo, E. (201), there are five factors that can pose a threat and can have a harmful effect. These forces are bargaining power of suppliers, threat of substitutes, bargaining power of buyers, threat of new entrants and competitive rivalry. Economic factors such as inflation, reduction in capital and efficiency of production can also pose a risk to the company. ABC Company must carefully weigh all options before pursing this new product line.
The ABC Company cash flow statement outlines cash receipts and cash payments in three categories; operating, investing and financial activities. Based upon the calculations, ABC Company has a surplus of $180,000 from operating activities and $100,000 invested in fixed assets. The only way to improve the cash flow position is by cutting the dividends. The new product line can be financed with the current cash flow as the present position of the company is good. Additionally, ABC Company could cut the dividend percentage if it is required to meet the cash demand. If the company needs additional financing beyond what can be provided internally, then company should go for corporate debt, as their overall financial position can warrant such. The choices for additional financing can be accomplished by issuing equity or corporate debt. The difference between the two can be confusing and are based upon several factors; the current market condition, the risk of excessive debt and ABC’s capital structure.
Common stock and securities can earn extra cash if needed for expanded production and manufacturing activities. Since the cedar doll houses will require additional raw materials to manufacture, current cash flow may not cover the full financing of the project. Additionally, more funds will be needed for labor in order to roll out the new production line.
The total production cost for the new product line is $54,000 and with an additional 5,000 machine hours for a per-product cost is $10.80. The new product will offset fixed expenses associated with Factory Overhead and Sales. The current product per unit cost is $6.30 as such; the cost of the expansion product is much higher. The addition of the new expansion will increase to $10.80 making the total unit cost $17.10. This drops the cost of the existing product to $4.86 thus; an expansion decreases the existing product by $1.44.
ABC Company wants a 40%...
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