Question

a Earleton Manufacturing Company has $2 billion in sales and $600,000,000 in fixed assets. Currently, the company's fixed assets are operating at 85% of capacity. What level of sales could Earleton have obtained if it had been operating at full capacity? Write out your answer completely. Round your answer to the nearest whole number.

b What is Earleton's target fixed assets/sales ratio? Round your answer to two decimal places.

c Earleton's sales increase 40%, how large of an increase in fixed assets will the company need to meet its target fixed assets/sales ratio? Write out your answer completely. Do not round intermediate calculations. Round your answer to the nearest whole number.

Answer 1

a). Full Capacity Sales = Current Sales / Current Capacity

= $2,000,000,000 / 0.85 = $2,352,941,176

b). Target fixed assets / sales ratio = Target Fixed Assets / Sales

= $600,000,000 / $2,352,941,176 = 0.255, or 25.50%

c). New Sales = Current Sales * (1 + g)

= $2,000,000,000 * (1 + 0.40) = $2,800,000,000

Required increase in Fixed Assets = Target fixed assets / sales ratio * [New Sales - Full capacity sales]

= 0.255 * [$2,800,000,000 - $2,352,941,176] = 0.255 * $447,058,823.50 = $114,000,000