Clark Paint and Varnish - Mangerial Accounting

Clark Paint

Introduction

Clark Paint and Varnish Co. Inc., was founded in 1928 at 966 Union St., by Fred Clark. At the beginning, it was one small room operation that manufacturing and selling paints door to door. In 1945, Milford Raker, who was already the owner of two Raker Paint factories in Pennsylvania, purchased Clark Paint Factory in West Springfield, MA and began his investment in expanding the company. In addition, Milford helped his uncles build several paint factories in New York, New Jersey and Pennsylvania; including Clark Paint Factory in Hartford, a factory and laboratory in Asbury Park. Overall, in 1963 when Milford died, he had about eight stores selling Clark Paint around the east coast area. After his death, his wife, Ruth Raker, took over Clark Paint Factory. Then, in 1978, Andrew Raker, the fourth generation of Rakers, took control of Clark Paint & Varnish Co. Andrew Raker devoted all his times learning from the ground up and making the company what it is today. Today, Clark Paint is a successful private independent company that specializes in manufacturing and selling Clark paints and other famous paint brands such as Pratt & Lambert, Benjamin Moore, Pittsburgh Paint, Cabot Stains.

Recommendation

I would recommend Clark Paint to accept the proposal of making the paint cans themselves for several reasons. First, if Clark Paint is to produce 1,100,000 cans each year for the next five years, its total annual production costs would be $422,460. On the other hand, if Clark Paint continues buying from the outside supplier, the annual purchase cost is $495,000. Therefore, by making the paint cans, Clark Paint would be able to save $72,540 (before tax) or $58,351 (after tax) each year. Second, though the proposal would require Clark Paint to purchase new equipment, it would be an acceptable investment. According to the Net Present Value analysis (see Excel document), the present value of cash savings, tax savings due to depreciation and disposal value of the new machine is $233,035; whereas the present value of the required initial investment (cost of new machine) is only $200,000. As a result, it yields a positive net present value of $33,035; indicating that this proposal will not only recover the original cost of investment ($200,000) but also provides sufficient excess cash inflows. Last but not least, Clark Paint should approve this proposal because it has an internal rate of return of 18%, which is greater than the company's minimum required rate of return (12%) for all new projects.

References

Andrew raker, fourth generation paint manufacturing. (2005). Retrieved from http://www.clarkpaint.com/about_us.php

Garrison, R.H., Noreen, E.W., & Brewer, P.C, (2010).