Question

Earleton Manufacturing Company has $2 billion in sales and $700,000,000 in fixed assets. Currently, the company's fixed assets are operating at 85% of capacity. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

b. What is Earleton's target fixed assets/sales ratio? Round your answer to two decimal places.

c. If Earleton's sales increase 40%, 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 dollar.

Answer 1

Requirement-(a), Full Capacity Sales

Full Capacity Sales = Current Sales / Percentage capacity of operation

= $2,00,00,00,000 / 0.85

= $2,352,941,176.47

Requirement (b), Target fixed assets/sales ratio

Fixed Assets / Sales Ratio = [Fixed Assets / Sales] x 100

= [$700,000,000 / $2,352,941,176.47] x 100

= 29.75%

Requirement (c), Increase in fixed assets will the company need to meet its target fixed assets/sales ratio

New Sales = $2,80,00,00,000 [$2,00,00,00,000 x 140%]

Sales at full capacity = $2,352,941,176.47

Increase in fixed assets will the company need to meet its target fixed assets/sales ratio = [New sales – Sales at full capacity] x Fixed Asset to sales ratio

= [$2,80,00,00,000 - $2,352,941,176.47] x 29.75%

= $447,058,823.53 x 29.75%

= $133,000,000.00