Question

Mitchell Manufacturing Company has $2,000,000,000 in sales and $240,000,000 in fixed assets. Currently, the company's fixed assets are operating at 80% of capacity.

1. What level of sales could Mitchell have obtained if it had been operating at full capacity? $2,500,000,0000
2. What is Mitchell's Target fixed assets/Sales ratio?  %
3. If Mitchell's sales increase 60%, how large of an increase in fixed assets will the company need to meet its Target fixed assets/Sales ratio?

Answer 1

a. The amount is computed as shown below:

Full capacity sales is computed as follows:

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

= $ 2,000,000,000 / 0.80

= $ 2,500,000,000

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

= $ 240,000,000 / $ 2,500,000,000

= 9.60%

c. The amount is computed as follows:

Sales is computed as follows:

= $ 2,000,000,000 x 1.60

= $ 3,200,000,000

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

= Target fixed assets / sales ratio x (Sales computed in part c - full capacity sales computed in part a)

= 9.60% x ($ 3,200,000,000 - $ 2,500,000,000)

= $ 67,200,000

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