Question

Beelzebub Manufacturing operates at approximately 100% of its capacity. Assume that all the company's costs and net working capital increase or decrease directly with changes in sales. The company's asset conversion ratio is 2.0. If the company's sales increased by 15%, it is reasonable that its fixed assets will need to increase to satisfy demand. How much will its fixed assets need to increase? Enter your number as a whole number without at percent sign.

Answer 1

As the company is operating at 100% capacity, with the increase in sales,the assets also will not to show a concomitant increase with respect to sales to satisfy demand

The Asset Conversion ratio(Turnover) = 2

ie Sales is two times times the average total assets.

Let the value of assets be X

Then sales = 2X

Given that Sales increases by 15%, ie New Sales = (1.15 * 2X)

For the new sales to be double that of Assets , New Asset value = 1.15 X ie 15% increase in total assets.

As working capital also increases by 15%, the fixed assets also need to show a 15% increase to satisfy demand as total assets increase by 15 %.