Question

Hodgkiss Mfg., Inc., is currently operating at only 83 percent of fixed asset capacity. Fixed assets are $395,000. Current sales are $500,000 and projected to grow to $650,602. How much in new fixed assets are required to support this growth in sales? Assume the company wants to operate at full capacity.

Answer 1

Fixed assets used to produce current sales of $500,000 = Fixed assets * Current utiliaztion %

Fixed assets used to produce current sales of $500,000 = 395,000 * 0.83

Fixed assets used to produce current sales of $500,000 = $327,850

In other words a fixed assets of $327,850 can produce sales of $500,000

So, to produce a sales of $650,602, we need fixed assets of (650,602 * 327,850/500,000) = $426,599.7314

We already have $395,000 of fixed assets. We need a new fixed assets of (426,599.7314 - 395,000)

New fixed assets required = $31,599.7314