Question

EXCESS CAPACITY

Earleton Manufacturing Company has $3 billion in sales and $600,000,000 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 answer completely. Round your answer to the nearest whole number.
   $  
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 20%, 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 whole number.
   $

Answer 1

a) Earleton Manufacturing Company has $3 billion in sales

The company's fixed assets are operating at 85% of capacity.

level of sales could Earleton have obtained if it had been operating at full capacity = $3000000000/ 0.85

= $ 3529411765

b) Earleton's target fixed assets/sales ratio = Fixed assets / sales of Earleton at full capacity

= 600000000 / 3529411765

=0.17 or 17%

c) When Earleton's sales increase 20% , sales = 3000000000 * 1.2 = 3600000000

Increase in fixed assets needed to meet its target fixed assets/sales ratio= 17% * ( 3600000000- 3529411765)

= $ 12000000