Question

Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 90% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?

Select the correct answer.

a. $24.05

b. $22.50

c. $20.95

d. $19.40

e. $25.60

Answer 1

Answer : Correct Option is (b.) $22.50

Reason :

To determine the cash that would it have generated we need to find out difference between actual fixed asset and optimum level of Fixed Asset

Cash Generated = Actual Fixed Asset - Optimum level of Fixed Asset

Given

Actual Fixed Asset = 225 million

Optimum Fixed Asset :

Sales at 100% capacity = Current Sales / Capacity used

= 450 / 90%

= 500 million

Target FA/Sales ratio = Fixed Asset / Sales at 100% capacity

= 225 / 500

= 0.45 or 45%

Optimum Fixed Asset = Current sales * Target FA/Sales ratio

= 450 * 45%

= 202.5

Cash Generated = Actual Fixed Asset - Optimum level of Fixed Asset

Cash Generated = 225 - 202.5

= $22.5 million.