Question

1. Albion Corporation has $550,000 in net fixed assets and is currently operating at 90% capacity. The firm's sales are $1,210,000 and they are forecasted to grow by 15% next year.
   1. What is the maximum sales level Albion's net fixed assets can support?

  

2. What is Albion's target capital intensity ratio?

3. What level of net fixed assets will Albion need to support its projected sales?

4. How much additional net fixed assets will need to be acquired for next year?

Answer 1

a. Let the maximum level of sales be X,

so, at 90% capacity, the level of sales generated is $1,210,000

so, 0.9*X = $1,210,000

So, the maximum level of sales is :

X = $1344,444.44

b. Target capital intensity ratio,

The sales level generated at 100% capacity level is of $1344,444,44

The level of fixed assets before we purchase new assets are : $5,50,000

So, the target capital intensity ratio is = Total assets /sales

$5,50,000/1344,444.44

=0.4091

c. When we have an asset level of 5,50,000 it supports maximum sales of $13,44,444.44

The projected sales are (1,210,000*1.15) = $1,391500

So, for that level of sales, the assets required will be : $56,9250

($1391500 * $5,50,000/ $1,39,1500) = $56,9250

d. So, the additional assets required is : ($56,9250 - $5,50,000) = $19,250