Question

Paladin Furnishings generated $2 million in sales during 2016, and its year-end total assets were $1.5 million. Also, at year-end 2016, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets must increase by $0.75 for every $1.00 increase in sales. Paladin's profit margin is 7%, and its retention ratio is 55%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Sales = $2,000,000

Profit margin = 7%

Net Income = 2000000*0.07 = $140,000

retention ratio = 55%

Retained earnings for 2016 = 140000*.55 = $77,000

Thus, Firm can invest $77,000 in Assets without raising fund externally.

And,

$1 increase in sales require $0.75 increase in assets.

Thus,

Increase in Sales in 2017 would be:

$= \frac{77,000}{0.75}*1$

$\bg_green \large = \$102,666.67$

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.