Question

Earleton Manufacturing Company has $3 billion in sales and $600,000,000 in fixed assets. Currently, the company's fixed assets are operating at 75% 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? Round your answer to two decimal places.
   %
4. 
   
5. If Earleton's sales increase 35%, 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

SALES ARE : $3,000,000,000 FIXED ASSETS = $600,000,000. Assets are operated at 75% capacity.

a. When the firm is operating at a capacity of 75%, the sales generated are $3 billion.

Now , if the firm will be operating at a 100% capacity, the level of sales generated will be:

75% * X = $3,000,000,000

So, the full capacity sales is = $4 billion

b. Earleton's target fixed assets/sales ratio is :

= $600,000,000/ 4,000,000,000

= 15%

c. Now, the target fixed asset to sales ratio 15%, the new level of sales is 1.35* 3 billion = $405,000,0000,

Now, since the sales level is increases by 35%, we will required increased assets to support this level of sales, but we will not require any additional assets till the level of sales achieved if it it had operated at 100% capacity which is $4,000,000,000. W will require assets beyond that level.

The increase in sales is : ( $405,0000000 - $4,000,000,000) = $5,000,0000

so, the increase in the level the level of fixed assets is 15%* 5,000,0000

=$75,000,00.

So, the additional fixed assets required is $75,000,00