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Case Background

Mr. Prescott, the controller for Blue Ridge Mill, is considering expanding operations by adding a new on-site woodyard to eliminate purchasing short wood externally and create new revenue opportunities. The woodyard would significantly reduce operating costs starting in 2017 and increase annual savings thereafter while also generating an estimated $4 million in additional revenue in 2017 and $10 million annually from 2018-2022 from selling excess shortwood production. The $18 million capital investment appears justified based on projected cost savings and revenues which would need to cover higher working capital from increased inventory and receivables averaging 10% of annual revenues.

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Manish Nair
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60 views2 pages

Case Background

Mr. Prescott, the controller for Blue Ridge Mill, is considering expanding operations by adding a new on-site woodyard to eliminate purchasing short wood externally and create new revenue opportunities. The woodyard would significantly reduce operating costs starting in 2017 and increase annual savings thereafter while also generating an estimated $4 million in additional revenue in 2017 and $10 million annually from 2018-2022 from selling excess shortwood production. The $18 million capital investment appears justified based on projected cost savings and revenues which would need to cover higher working capital from increased inventory and receivables averaging 10% of annual revenues.

Uploaded by

Manish Nair
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Case Background

January 2016, Mr. Bob Prescott, the controller for Blue Ridge Mill, was
considering expanding his operation by addition of a new in-site longwood
woodyard. Two primary benefit expected out of the new addition was 1) eliminate
the need to purchase short wood from an outside supplier, and 2) create new
business opportunity to sell the short wood on the open market. The new
woodyard will make Blue Ridge Mill to reduce its operating cost and increase the
revenue.
When the new woodyard began operating in 2017, it would significantly reduce
the operating costs of the mill. The operational saving of $2.0 million for2017
and $3.5 million per year thereafter would be achieved as difference I cost of
procuring short wood on-site versus buying it in the open market. Prescott
planned in selling the shortwood in open market as soon as possible. He is
expecting a revenue of approximately $4 million in 2017 and $10 million for the
years from 2018 to 2022, by selling the shortwood utilizing the excess production
capacity. Its estimated that the cost of goods sold (before including depreciation
expenses) would be 75% of revenues, and SG&A would be 5% of revenues.
In addition to the capital outlay of $18 million, the increased revenues would
necessitate higher levels of inventories and accounts receivables. The total
working capital would average 10% of annual revenues. Therefore, the amount
of working capital investment each year would equal10% of incremental sales for
the year. At the end of the life of the equipment, in 2020, all the networking
capital on the books would be recoverable at cost, whereas only 10% or $1.8
million (before taxes) of the capital investment would be recoverable
Critical Financial Problems
Q1. Is the investment of $ 18 million justifiable?
By adding the new onsite woodyard, Mr. Prescott is estimating to generate an additional
revenue of $4 million in 2017 and $10 million for the years from 2018 to 2022. Its expected that the
cost of good sold would be 75% of revenue and 5% for SG&A.

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