Question

8.  Problem 16.12

EXCESS CAPACITY Earleton Manufacturing Company has $2 billion in sales and $900,000,000 in fixed assets. Currently, the company's fixed assets are operating at 85% of capacity. 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. $   What is Earleton's target fixed assets/sales ratio? Round your answer to two decimal places. % If Earleton's sales increase 25%, 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.
Calculation of level of sales required to operate at full capacity
Full capacity sales	Current actual sales/(Current operating capacity of fixed assets)
Full capacity sales	2000000000/85%
Full capacity sales	$2,352,941,176
b.
Calculation of target fixed assets/Sales ratio
Target fixed assets/Sales ratio	Value of fixed assets/Full capacity sales
Target fixed assets/Sales ratio	900000000/2352941176
Target fixed assets/Sales ratio	38.25%
c.
Increase in sales	2000000000*1.25
Increase in sales	$2,500,000,000
Increase in fixed assets	0.3825*(2500000000-2352941176)
Increase in fixed assets	$56,250,000
Thus, fixed assets should increase by $56,250,000.
Sales increase in excess of full capacity would require investment in additional fixed assets.