Question

Earleton Manufacturing Company has $2 billion in sales and $543,500,000 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 25%, 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

Requirement-(a), Full Capacity Sales

Full Capacity Sales = Current Sales / Percentage capacity of operation

= $2,000,000,000 / 0.85

= $2,352,941,176

Requirement (b), Target fixed assets/sales ratio

Fixed Assets / Sales Ratio = [Fixed Assets / Sales] x 100

= [$543,500,000 / $2,352,941,176] x 100

= 23.10%

Requirement (c), Increase in fixed assets will the company need to meet its target fixed assets/sales ratio

New Sales = $2,500,000,000 [$2,000,000,000 x 125%]

Sales at full capacity = $2,352,941,176

Therefore, the Increase in fixed assets will the company need to meet its target fixed assets/sales ratio = [New sales – Sales at full capacity] x Fixed Asset to sales ratio

= [$2,500,000,000 - $2,352,941,176] x 23.10%

= $147,058,824 x 23.10%

= $33,970,588