Question

Earleton Manufacturing Company has $2 billion in sales and $400,000,000 in fixed assets. Currently, the company's fixed assets are operating at 80% of capacity.

1. What level of sales could Earleton have obtained if it had been operating at full capacity? Write out your answer completely. Round your answer to the nearest whole number.
   $
2. 
   
3. What is Earleton's target fixed assets/sales ratio? Round your answer to two decimal places.
   %
4. 
   
5. If Earleton's sales increase 30%, 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. Do not round intermediate calculations. Round your answer to the nearest whole number.
   $

Answer 1

Requirement-(a), Full Capacity Sales

Full Capacity Sales = Current Sales / Percentage capacity of operation

= $2,000,000,000 / 0.80

= $2,500,000,000

Requirement (b), Target fixed assets/sales ratio

Fixed Assets / Sales Ratio = [Fixed Assets / Sales] x 100

= [$400,000,000 / $2,500,000,000] x 100

= 16.00%

Requirement (c), Increase in fixed assets will the company need to meet its target fixed assets/sales ratio

New Sales = $2,600,000,000 [$2,000,000,000 x 130%]

Sales at full capacity = $2,500,000,000

Therefore, the Increase in fixed assets will the company need to meet its target fixed assets/sales ratio = [New sales – Sales at full capacity] x Fixed Asset to sales ratio

= [$2,600,000,000 - $2,500,000,000] x 16.00%

= $100,000,000 x 16.00%

= $16,000,000