Custom Snowboards, Inc. Case
Custom Snowboards, Inc.
Expansion into Europe
The management of Custom Snowboards, Inc. is considering an expansion into Europe. The percentage of the total sales from Europe has grown and the growth is expected to continue. The company could pursue this expansion from a variety of different options.
Business Risk Assessment:
The CEO is concerned about the risks of expansion into Europe. In particular, he wonders about what affects an European expansion will have on the internal operations of the entity and how the company will react to external issues that any company expanding into Europe will encounter.
Custom Snowboards has two options for European expansion. In the first option, they can expand by building a new manufacturing facility. In the second option, then can merge with or acquire the operations of European SnowFun. The relevant information for the two options is given below:
1. Custom Snowboards has investigated expanding into Europe by building a new manufacturing facility. The manufacturing facility to include building and equipment will cost $800,000. An additional $200,000 of working capital will be needed for starting up operations.
There are some additional considerations for the company to consider for the procurement of building and equipment. The company has researched alternatives of paying for the building and equipment on a time basis at a 6% financing rate. The following two alternatives are under consideration:
a. Entering into a sale-leaseback.
b. A straight purchase over time.
An analysis of both options are presented in the Excel workbook.
2. European SnowFun is currently operating in Europe and has heard about your expansion plans. European SnowFun has proposed to combine businesses with Custom Snowboards. European SnowFun’s product is less durable, but the company’s sales are relatively strong based on offering a personalized paintjob on snowboards that are special ordered. The following two alternatives are under consideration:
a. A merger where the shareholders of European SnowFun would receive one share of Custom Snowboards’ stock for each three shares they hold at the time of the merger (stock swap). European SnowFun currently has 300,000 shares outstanding.
b. An Acquisition. European SnowFun has offered to be acquired. Custom Snowboards is considering this option at $2.40/share (stock purchase).
The Excel workbook includes data calculations for all of the options in the expansion decision. The company uses a 10% cost of capital (hurdle rate) for capital budgeting and expansion decision.
The CEO is expecting your recommendation regarding which expansion option the company should pursue when you make the presentation.
Financing the European Expansion:
If Custom Snowboards chooses the first expansion option highlighted above, then it has decided to fund it through increasing its capital structure. It has concluded that it can raise the capital through the issuance of long-term debt, sale of common stock, or a combination of both debt and common stock. The CEO would like a recommendation for the option that would maximize the value for shareholders of the company.
Product Cost Comparison: Traditional vs. ABC
Custom Snowboards traditionally uses two separate single overhead rates to apply overhead to its two product lines: regular snowboards and personalized snowboards. It is investigating using ABC analysis to better allocate overhead to its two product lines. The unit product cost for the two product lines using traditional and ABC method of applying overhead is given in the excel workbook.