ABC Company is a small contract manufacturing business. They are located in a small town and employ 33 people. They own an 80,000 square foot building that is built on 66 acres. They manufacture their own product and also do contract manufacturing for other customers. ABC Company has been approached by a new customer requesting ABC Company to manufacture their product with the new customer’s brand name. At this time, ABC Company is running the manufacturing line for this product for another customer and is running at capacity on first shift. The owners of ABC Company think they would like to build an expansion to the building to run another complete line. This would also open space for warehousing the new finished product and additional raw materials. The same raw materials would be used to manufacture this product, but at larger quantities per week. The only new materials would be the label and outer box with the customer’s name on them. The owners feel that adding on to the building and expanding to an additional manufacturing line would open up more opportunities for additional customers.
ABC Company has hired the consulting firm of CEG Consultants to look into the financing of this project and to see if this is the best decision at this time. Besley & Bringham (2008, p. 148) write that “if a firm is considering whether to increase operations by adding capital projects to existing assets that will help produce either more of its existing products or entirely new products, expansion decisions are made.” CEG Consultants will review all options to best benefit ABC Company for their decision. We realize that the owners of ABC Company are leaning toward a building expansion, but we are hired to bring other options to the table. Rumelt (2011) writes that “a strategy involves focus and therefore, choice”. Not only will the expansion be considered, but we will also assess another choice that will benefit ABC Company financially.
The financial information CEG Consultants receives from ABC Company will be vital to the decision making process. Financial statements will be looked at and also inspecting the manufacturing building. CEG Consultants will also talk to the engineering team, production supervisor, team leaders and all the assembly line employees. This will give CEG Consultants a wide range of information to use. Birn (2004) writes in order to make a decision facts are needed to support it. CEG Consultants will investigate all approaches to reduce uncertainty in the final evaluation given to ABC Company.
ABC Company is an S Corporation. The owners are the only stockholders. Any income earned is passed through to the owners so that it is taxed only once (Besley & Brigham 2008, p. 7). This means that the owners do not have to answer to other stockholders and any net income earned can be reinvested back into the company. ABC Company has received a contract with a new customer requesting five thousand...