EXCESS CAPACITY
Earleton Manufacturing Company has $2 billion in sales and $500,000,000 in fixed assets. Currently, the company's fixed assets are operating at 75% of capacity.
a. The level of sales is computed as shown below:
= $ 2,000,000,000 / 0.75
= $ 2,666,666,667
b. Target fixed assets / sales ratio is computed as follows:
= $ 500,000,000 / $ 2,666,666,667
= 18.75%
c. Sales increase 40%
= $ 2,000,000,000 x 1.40
= $ 2,800,000,000
Increase in fixed asset will be as follows:
= 18.75% x ($ 2,800,000,000 - $ 2,666,666,667)
= $ 25,000,000
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