Catawba Industrial Company
Problem
As the financial consultants of Catawba Industrial Company our aim is to determine the best course of action to pursue with respect to the introduction of the new proposed light weight compressor. This course of action must remain within the production capacity restrictions the company faces.
Alternatives
Status Quo:
The company will continue to produce the standard compressor to satisfy the requirements for the automatic paint system and the demand that currently exists for this product.
Introduce Light Weight Compressor: The company will introduce the new light weight compressor to replace the standard unit in the automatic paint system and to satisfy any demand that might exist through industrial distributors.
Mixed Proposal: The company will continue to produce ten standard units necessary for the automatic paint system. After the demand is met for the automatic paint system, the new light weight compressor will be produced and sold to meet the projected demand.
Criterion: To maximize future cash flows
When deciding the best alternative, the company should choose the one that will maximize future cash flow. Cash flows are cash transactions that either cause the company to spend or receive actual monetary units. The decision may change the level of operation, meaning it will affect both costs and revenues; therefore, the decision should maximize the net difference between the two. This will allow for the highest possible profit within the production capacity of the warehouse. The company cannot change what has happened in the past, therefore must focus on cash flows that affect the company in the future. Lastly, cash flow is the only factor that the company can influence in the short run. If this is managed properly, in the long run net income will follow the trend of cash flows.
Analysis
The following table explains what cost accounts are relevant to the decision criterion. The costs are relevant because they differ
As the financial consultants of Catawba Industrial Company our aim is to determine the best course of action to pursue with respect to the introduction of the new proposed light weight compressor. This course of action must remain within the production capacity restrictions the company faces.
Alternatives
Status Quo:
The company will continue to produce the standard compressor to satisfy the requirements for the automatic paint system and the demand that currently exists for this product.
Introduce Light Weight Compressor: The company will introduce the new light weight compressor to replace the standard unit in the automatic paint system and to satisfy any demand that might exist through industrial distributors.
Mixed Proposal: The company will continue to produce ten standard units necessary for the automatic paint system. After the demand is met for the automatic paint system, the new light weight compressor will be produced and sold to meet the projected demand.
Criterion: To maximize future cash flows
When deciding the best alternative, the company should choose the one that will maximize future cash flow. Cash flows are cash transactions that either cause the company to spend or receive actual monetary units. The decision may change the level of operation, meaning it will affect both costs and revenues; therefore, the decision should maximize the net difference between the two. This will allow for the highest possible profit within the production capacity of the warehouse. The company cannot change what has happened in the past, therefore must focus on cash flows that affect the company in the future. Lastly, cash flow is the only factor that the company can influence in the short run. If this is managed properly, in the long run net income will follow the trend of cash flows.
Analysis
The following table explains what cost accounts are relevant to the decision criterion. The costs are relevant because they differ