Question

Problem 3-20 Fixed Assets and Capacity Usage The discussion of EFN in the chapter implicitly assumed that the company was operating at full capacity. Often, this is not the case. For example, assume that Rosengarten was operating at 90 percent capacity. Full-capacity sales would be $1,000 / .90 = $1,111. The balance sheet shows $1,800 in fixed assets. The capital intensity ratio for the company is: Capital intensity ratio = Fixed assets/Full-capacity sales = $1,800 / $1,111 = 1.62 This means that Rosengarten needs $1.62 in fixed assets for every dollar in sales when it reaches full capacity. At the projected sales level of $1,250, it needs $1,250 × 1.62 = $2,025 in fixed assets, which is $225 lower than our projection of $2,250 in fixed assets. So, EFN is only $565 – 225 = $340. Thorpe Mfg., Inc., is currently operating at only 90 percent of fixed asset capacity. Current sales are $805,500 and sales are projected to grow to $940,000. The current fixed assets are $775,000. How much in new fixed assets are required to support this growth in sales? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Need the New fixed assets $

Answer 1

Full capacity sales = $805,500 / 0.90 = $895,000

To find the new level of fixed assets,
we need to find the current percentage of
fixed assets to full capacity sales.

Doing so, we find:
Fixed assets / Full capacity sales = $775,000 / $895,000 = 0.8659

Next, we calculate the total dollar amount of fixed assets needed at the new sales
figure:
Total fixed assets = 0.8659 x $940,000 = $813,966.48
The required investment in new fixed assets is the total fixed assets at the new
sales figure minus the current level of fixed assets:
New fixed assets = $813,966.48 - $775,000 = $38,966.48, or $38,966