New product Recomendation
ABC Company is trying to increase sales from 1.2 million to 3 million within a 3 year time frame which is a very aggressive move to make since that goal of 3 million in sales is more than twice what the company is currently brining in. The company will need to review several factors to determine if this type of an increase is even possible to make by adding an additional product of making cedar doll houses to try to supplement the income. There are several factors that need to be taken into consideration before any determinations can be made and before production of the doll houses could begin at all. Some of those possible set backs are: quality, competition, ...view middle of the document...
The time to complete the new line needs to be considered because they do not want to so involved in making a new product that the production for their already profitable product starts to suffer. They need to determine how much they will be spending in raw materials to be able to make the new product so they can see what price point they will be at to determine if the new product will bring in a viable income or if they will be pricing themselves so high that people will not want to purchase the product
One of the biggest things to look at is the current cash flow statement of ABC Company in order to determine the current cash flow and how ABC Company is currently spending the money they have. Below is a cash flow statement for ABC company using the direct method to determine the numbers
CASH FLOW STATEMENT
Received from customers $ 1,260,000
Paid to Suppliers $ (830,000)
Paid for expenses $ (250,000)
Paid for taxes $ -
Cash flow from operating activities $ 180,000
Purchased fixed assets $ (100,000)
Cash flow from investing activities $ (100,000)
Paid for dividend $ (100,000)
Cash flow from financing activities $ (100,000)
Overall change in cash flows $ (20,000)
Opening cash balance $ 70,000
Ending cash balance $ 50,000
After reviewing this cash flow statement it appears that ABC company has a surplus of cash of $180,000 from their operating expenses The company has used $100,000 to invest so the company can use that money later for expanding a portion of their product line or opening a new facility. The opening cash balance on the statement is $70,000 which leaves the company with an ending balance of $50,000
I would suggest the company try to improve their cash flow statement for future transactions even though they do show a positive cash flow resulting from their operations. The company is taking a large portion of their profits and investing them into capital investments to save for future growth. This is a good idea but they need to keep in mind that on the cash flow statement this appears to be a payment they are paying out of the company until the assets are recovered with the potential interest. One suggestion I have is for the company to review the dividend payments. It is true that stockholders expect to get payment from their investments but if they company can retain some of the money instead of paying them out in dividends they can use that for potential growth in the future.
The first step to determining if the cost of the new product is affordable to ABC Company is to determine the cost per unit that is associated with manufacturing the new product.
Direct Materials $5.60 $5.60
Direct labor dollars needed per product $ 4.00 $4.00
Variable Factory Overhead $1.00 ...