Question

Carlsbad Corporation's sales are expected to increase from $5 million in 2018 to $6 million in 2019, or by 20%. Its assets totaled $4 million at the end of 2019. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2018, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 7%, and the forecasted retention ratio is 45%. Use the AFN equation to forecast the additional funds Carlsbad will need for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.

Answer 1

Solution :-

Percentage Increase in sales =

Percentage Increase in sales = 0.20

To Calculate Additional Fund Needed in Coming year (AFN)-

AFN = Current Assets * percentage Increase In sales - Current Liabilities * percentage increase in sales - New Level of sales * Profit Margin * Retention Ratio.

AFN = 40,00,000 * 0.20 - 10,00,000 * 0.20 - 60,00,000 * 0.07 * 0.45

AFN = $8,00,000 - $2,00,000 - $1,89,000

AFN = $4,11,000.

Additional Fund needed in coming year is amounting to $4,11,000.

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