Question

Earleton Manufacturing Company has $3 billion in sales and $900,000,000 in fixed assets. Currently, the company's fixed assets are operating at 85% of capacity.

1. What level of sales could Earleton have obtained if it had been operating at full capacity? Write out your answers completely. For example, 13 million should be entered as 13,000,000. Round your answer to the nearest dollar.
   
2. 
   
3. What is Earleton's target fixed assets/sales ratio? Do not round intermediate calculations. Round your answer to two decimal places.
     
4. 
   
5. If 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 dollar.
   

Answer 1

a. The level of sales is computed as shown below:

= Actual amount of sales / % of capacity at which Fixed Assets are currently operating

= $ 3,000,000,000 / 0.85

= $ 3,529,411,765

b. Target Fixed Assets / Sales ratio is computed as follows:

= Fixed assets / Level of sales computed in part a above

= $ 900,000,000 / $ 3,529,411,765

= 25.50%

c. The amount is computed as follows:

Sales is computed as follows:

= $ 3,000,000,000 x 1.40

= $ 4,200,000,000

So, the increase in fixed assets will be computed as follows:

= Target fixed assets / sales ratio x (amount of sales computed in part c - sales computed in part a)

= 25.50% x ($ 4,200,000,000 - $ 3,529,411,765)

= $ 171,000,000 Approximately