Question

Quantitative Problem 1: Beasley Industries' sales are expected to increase from $4 million in 2017 to $5 million in 2018, or by 25%. Its assets totaled $2 million at the end of 2017. Beasley is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2017, current liabilities are $720,000, consisting of $140,000 of accounts payable, $400,000 of notes payable, and $180,000 of accrued liabilities. Its profit margin is forecasted to be 4%, and its dividend payout ratio is 50%. Using the AFN equation, forecast the additional funds Beasley will need for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations. The AFN equation assumes that ratios remain constant. However, firms are not always operating at full capacity so adjustments need to be made to the existing asset forecast. Excess capacity adjustments are changes made to the existing asset forecast because the firm is not operating at full capacity. For example, a firm may not be at full capacity with respect to its fixed assets. First, the firm's management must find out the firm's full capacity sales as follows: Full capacity sales = Percentage of capacity at which fixed assets were operated Next, management would calculate the firm's target fixed assets ratio as follows: Total fixed assets – Actual fixed assets Full capacity sales Finally, management would use the target fixed assets ratio with the projected sales to calculate the firm's required level of fixed assets as follows: Required level of fixed assets = (Target fixed assets/Sales) (Projected sales) Quantitative Problem 2: Mitchell Manufacturing Company has $1,900,000,000 in sales and $370,000,000 in fixed assets. Currently, the company's fixed assets are operating at 80% of capacity. a. What level of sales could Mitchell have obtained if it had been operating at full capacity? Round your answer to the nearest dollar. Do not round intermediate calculations. Sales b. What is Mitchell's Target fixed assets/Sales ratio? Round your answer to two decimal places. Do not round intermediate calculations. % c. If Mitchell's sales increase by 35%, how large of an increase in fixed assets will the company need to meet its Target fixed assets/Sales ratio? Round your answer to the nearest dollar. Do not round intermediate calculations.

Answer 1

1. flccording to AfnI equation, AFN = merease in Tofal Assels - Increase in Spontaneous Liabilito - Addition to Retained earnings . (1) As it is mentioned that asset must grow in proportion to projecte al Sodles Therefore, + inezease in total assels = 25 % of $ 2mn = 25 x 2 000 000 = $500,000 increase in spontaneous-labilities: we know, Spontaneous liabilities = account payable + ateraced labilehe = $ 140,000 + 180,000) = $ 320,000 Increase in spontaneous liabilities in proportion to increase in total assets = 20 090 of $ 320,000 2 20 x 320,000 = $ 64,000 * Addition to Retained earnings: - Revenue from sales * poofit margins (4.) . x (100 - divideut payout ) Yo. = $5,000,000 X 440 x C100-50) % = $ ,000,000 X 0.04 x 0.5 = $ 100,000 Thus, additional funds needed can be caleulated using AFN = $ 500,000 - $ 64,000 - $ 100,000 = $336,000. Hence, the forecasted additional for fund needed meeting the expected sales by Beasley Industries is $ 336,000 Scanned with CamScanner

Harce, the full capacity sales is $2,315,000,000 - (a) the total fixed assets | sales is 15.58 % - (b) the requiveo increase in fiveod assels is $129,508,750 -(0) Scanned with CamScanner