Question

EXCESS CAPACITY

Williamson Industries has $3 billion in sales and $1.3 billion in fixed assets. Currently, the company's fixed assets are operating at 95% of capacity.

1. What level of sales could Williamson Industries have obtained if it had been operating at full capacity? Write out your answer completely. For example, 25 billion should be entered as 25,000,000,000. Round your answer to the nearest cent.
   $______?
2. 
   
3. What is Williamson's target fixed assets/sales ratio? Round your answer to two decimal places.
   =_____ %
4. 
   
5. If Williamson's sales increase 9%, 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. For example, 25 billion should be entered as 25,000,000,000. Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. Do not round intermediate calculations.
   $______?

Answer 1

Williamson Industries has $3 billion in sales and $1.3 billion in fixed assets. Currently, the company's fixed assets are operating at 95% of capacity.

1. What level of sales could Williamson Industries have obtained if it had been operating at full capacity?

Level of sales of Williamson Industries if it is operating at full capacity = Actual Sales / present operating capacity

= $3 billion / 95%

= $3,000,000,000/0.95 = $3,157,894,736.84

2. What is Williamson's target fixed assets/sales ratio

Williamson's target fixed assets/sales ratio

= Actual fixed assets of company /Full capacity sales of company

= $1,300,000,000 / $3,157,894,736.84

= 0.4117 or 41.17%

3. If Williamson's sales increase 9%, how large of an increase in fixed assets will the company need to meet its target fixed assets/sales ratio?

Required level of fixed asset = (target fixed asset/Sales) * Projected sales

= (41.17%) * $3 billion * (1 +9%)

= 0.4117 * $3,270,000,000

=$1,346,150,000

Therefore an increase in fixed assets = Required level of fixed asset – initial fixed asset

= $1,346,150,000 - $1,300,000,000

=$46,150,000