ECOBAGS, INC.

:
PRODUCTION
PLANNING IN A
ENVIRONMENT
STANDARD COST

CASE STUDY
GROUP 2
 INTRODUCTION

EcoBags, Inc. is an industrial bag maker of flexible intermediate bulk

containers (FIBCs). The company plans for growth and expansion
which requires additional funding. Jamie Smith, the owner, does not
want to dilute her ownership equity by accepting an additional equity
investment. Hence, debt financing with interest and covenants is the
best option. Following an evaluation of EcoBags' two options, it was
determined that maintaining the status quo would be the most
advantageous action. While inventory reduction gives a 15.27 debt-
to-equity ratio, the status quo resulted in ratio. The latter, being
lower, ensures a better return for the company.
ISSUES AND
CONCERN
-EXCEL
 POINT OF VIEW STATEMENT OF THE
PROBLEM

In this case, the accountant How can EcoBags, Inc.

is responsible for strategically finance its growth
addressing the problem, and expansion while ensuring
having the expertise to continued access to capital
analyze financial and compliance with debt
implications to ensure
covenants?
compliance with the debt
covenants.
 ADVANTAGES:
• Ensures financial stability with a positive net income,
which can support the company’s operational needs.
• Increased shareholders' equity, which can attract future
lenders and investors.
• Low risk of early loan repayment due to the debt-to-
equity ratio being lower than the covenant limit.
ACA 1:
DISADVANTAGES:
Maintaining Financial
Stability Through the • A portion of the capital is tied up in inventory, limiting
Status Quo Strategy the company’s ability to pursue expansion or innovation.
• Immediate cash outflow may strain the company’s
at EcoBags, Inc. liquidity due to high cash disbursements for direct
materials.
• Reduces the company’s flexibility to respond to
sudden market changes or opportunities, as a
significant portion of the capital is invested in
inventory.
 ADVANTAGES:

1. Lower Inventory Holding Costs: Reducing

inventory would decrease storage expenses,
handling costs, and the risk of inventory
obsolescence, leading to better operational
efficiency.
ACA 2: 2.Increased Cash Flow:With fewer resources tied
up in inventory, more cash would be available for
Inventory other business activities such as debt servicing,
Reduction expansion, or investing in production
improvements.
Advantages 3. Lean Operations: A reduced inventory
encourages more precise production planning
and reduces waste, allowing the company to be
more agile and responsive to changes in
demand.
 1. Higher Unit Costs: As seen in the case, the
inventory reduction strategy leads to a higher
Cost of Goods Sold (COGS) due to lower
production volumes, reducing the company's
profitability.
2. Risk of Stockouts: With a smaller inventory,
ACA 2: EcoBags may not be able to meet unexpected
demand spikes, leading to lost sales
Inventory opportunities and possibly damaging customer
Reduction relationships.
Advantages 3. Higher Debt-to-Equity Ratio: The strategy
leads to a much higher debt-to-equity ratio
(15.27) compared to the status quo (3.77),
which risks violating loan covenants,
threatening the financial stability of the
company.
RECOMMENDATI
ON

Among the two alternative courses of action presented,

ACA 1: Maintaining Financial Stability Through the Status Quo

Strategy, is recommended as the primary course of action. Under the
status quo strategy, the company will generate a net income of
202,500Php due to a lower COGS. This will increase shareholders' equity
of 398,200Php; resulting in a lower debt to equity ratio of 3.77. The
company will also have a higher cash disbursement of 2,750,000Php due
to a larger quantity of direct materials acquired. Based on the results,
status quo is the best option and the most advantageous for the company
because of the positive net income, the lower debt-to-equity ratio, and the
lower Cost of Goods Sold.
 PLAN OF ACTION

1. Enhance Liquidity Management - Identify 3. Improve Operational Efficiency -

any excess or slow-moving stock to reduce Identify areas for cost reduction and
holding costs and free up cash including Think ofimprovements
efficiency your learning style.
within What
current
variances between standard and actual costs. works and
operations suchdoesn’t work? Discuss
as outsourcing the raw
Negotiate better payment terms with suppliers with your group areaswith
of
and explore options for extending credit terms.
materials, through negotiations
suppliers,
improvement or investing
each inoftechnology.
you would like
to make and list 3 of them on
this slide.
2. Evaluate Investment Opportunities : 4. Strengthen Financial Position -
Assess potential investment opportunities that Monitor financial ratios and build strong
could enhance growth or innovation. Diversify
investments beyond inventory to balance risk
relationships lenders and investors.
and increase flexibility such as investing in
technology, market research, or new product
development.
CONCLUSION:

In conclusion, EcoBags should stick with the status

quo strategy. The data shows that this approach will
lead to a net income due to lower COGS, increasing
shareholders' equity and reducing the debt-to-equity
ratio. Additionally, the company will have higher
cash disbursements because of greater direct
material purchases. In contrast, the inventory
reduction strategy would result in a net loss due to
higher COGS from production volume variance,
decreasing equity and increasing the debt-to-equity
ratio. For these reasons, Jamie should maintain the
status quo, as it offers a better financial outlook with
THANK YOU