Question

(Percentage of sales —plant and equipment) A company had sales last year of $16,000,000 and forecasts sales of $20,000,000 in the coming year. It ended the year with $5,000,000 of plant and equipment. Forecast the end-of-coming-year balance for plant and equipment under each of the following alternatives. a. Plant and equipment is now at capacity and will be increased proportionally to sales. b. Plant and equipment is now at capacity. New plant and equipment must be purchased in $750,000 increments. c. Plant and equipment is now being used at 90% of capacity. New plant and equipment will be purchased in the exact amount needed. d. Plant and equipment is now being used at 90% of capacity. New plant and equipment must be purchased in $750,000 increments.

Answer 1

do increase in sales- 20,000,000 - 16,000 poo xloo 16000000 = 25.10 a) since sales are increasing 25%, plant & equipment - must also increase 251. - end of coming-year balance for P&E = 5,000,000 x 1.25 = 6,250,000 6) Required increase in P& E= 6,250,000 - 5000,000 = $ 1,250,000 - but since P & E can only be purchated in iquement of 750,000 per increment new P&E'S 750,000 + 750,000 = 1,500,000 i end a coming year = 5,000,000 1,500,000 balance for E&F = 6,500,000 c) current P&E in ure & 5,000,000 x 90% =$ 4,500,000 we requise 35% increase in PAE .. end of coming year = 4,500,000 x 1.25 balance for P&E = $5,625,000 d) Required increase in (& E= 5625000 - 5000000 = 625,000 but we need inuement of 750,000 end of coming year = go0o,000 + 750,000 balance for P&E = $5,750,000 x 25

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