Question

Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 90% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated? Select the correct answer.

Answer 1

Particulars Sales Fixed assets % of capacity utilized Sales at full capacity = Actual sales/% of capacity used = $450 / 90% Target FA/Sales ratio = Fixed Assets /Sales at full capacity = $225 $500 Optimal FA = Sales*Target Fixed Assets/Sales ratio = $450*45% Cash generated = Actual FA -Optimal FA = $225- $202.5 Amount (in millions) $450 $225 90% $500 45% $202.5 $22.50 So the company would have generated $22.50 millions