Question

encourage and respond to questions. Page 395 ENTREPRENEURIAL DECISION A1 BTN 10-5 Review the chapter's opening feature involving Deb and Dan Carey and their company, New Glarus Brewing Company. Assume that the company currently has net sales of $8,000,000 and that it is planning an expansion that will increase net sales by $4,000,000. To accomplish this expansion, the company must increase its average total assets from $2,500,000 to $3,000,000. Required 1. Compute the company's total asset turnover under (a) current conditions and (b) proposed conditions. 2. Evaluate and comment on the merits of the proposal given the analysis in part 1. Identify any concerns we would express about the proposal.

Answer 1

1.) Asset turnover ratio = net sales / average assets

Current ATR = 8,000,000/2,500,000 = 3.2 times

Proposed ATR = 12,000,000/3,000,000= 4 times

2.) Merits of proposed change in net assests-:

a high asset turnover ratio means a company is performing efficiently, as the ratio means they are generating more revenue per dollar of assets.

However, the asset turnover ratio only measures the correlation of the two values and does not indicate any causation. A drop in asset turnover ratio could lead managers on a wild goose chase for obsolete assets, when in reality the revenue dropped for an independent reason. Because of this pitfall, the asset turnover ratio should be analyzed alongside a variety of profit and revenue ratios.