Principles of Accounting II
ACC206: Principles of Accounting II (BAH1603A)
Instructor: Dawayne Rowell
February 15th, 2016
RISK PROFILE OF THE COMPANY
Review of ABC Company and the directions it is targeting. The strategy of the company is to lift the expected sales in an aggressive fashion, with the expected end target being to triple the current levels. The plan is to push sales into the targeted range of $3 million within 3 years versus the current amount which sits at $1.2 million. We will identify the perceived risk factors that may impact this aggressive strategy and its successful execution. The following will be those risk factors:
i. Risk of ...view middle of the document...
Non-cash item are excluded from the cash flow to give the true financial performance.
Operating activity results in surplus cash of $ 180,000 which has been invested to acquire capital assets of $100,000 for future expansion purposes. Further, to meet the expectations of shareholders the company has paid out dividend of $100,000. The company has surplus opening balance of $70,000; resultantly the ending balance remains $50,000.
IMPROVEMENT OF CASH FLOW
Although the current cash position of the company is positive. The company has generated positive cash flow from the operations. The same has been invested in fixed asset for the future expansion of the company, resulting in higher sales.
Although the shareholders are expected to be paid by it is advisable to review the dividend distribution policy of the company to retain the surplus for financing the future growth.
As the current position of the company is quiet sound enough to finance the current project. Further the company has made investment in fixed asset for the expansion of the business. If company maintains the same cash position the external source of financing would not be required by the company.
Further in order to reduce the discount rate the ABC can consider the option of raising funds from debt financing only in order to reach an optimal capital structure.
Financing can be by either debt or equity. Debt financing has the benefit of fixed pay out and tax shield. In debt financing the interest expense is allowable expense resulting in low tax expense, where as in case of equity finance the cost of equity is dividend, and no advantage can be availed in tax.
The company position is strong enough so its better that company should use debt financing instead of equity financing.
NEW PRODUCT COST
PRODUCT COST FOR THE EXPANSION
The product cost per unit under absorption costing is $15.00 and under variable costing are 10.60.
| ABSORPTION COSTING | VARIABLE COSTING |
Direct Materials | $ 5.60 | $ 5.60 |
Direct labor dollars needed per product | $ 4.00 | $ 4.00 |
Variable Factory Overhead | $ 1.00 | $ 1.00 |
Fixed Factory Overhead | $ 4.40 | S - |
Product Cost Per Unit | $ 15.00 | $ 10.60 |
IMPACT OF EXPANSION ON PRODUCT COST
One of the major benefits of expansion is the reduction of fixed cost (fixed and selling). The cost is absorbed by 85,000 units instead of 80,000 units resulting in saving of $0.42 per unit.
| | AFTER EXPANSION | |
Fixed Factory Overhead before expansion | $ 2.48 | $ 2.20 | |
Fixed Selling Expense | $ 2.39 | $ 2.25 | |
Total | $ 4.87 | $ ...