Question

Earleton Manufacturing Company has $2 billion in sales and $800,000,000 in fixed assets. Currently, the company's fixed assets are operating at 80% of capacity.

a. 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.

b. What is Earleton's target fixed assets/sales ratio? Round your answer to two decimal places.

c. If Earleton's sales increase 35%, 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

a)Level of sales if operated at 100% capacity = current Sales /% of capacity

                                                         = 2,000,000,000/.80

                                                         = $ 2,500,000,000

b)Target Fixed asset /sales Ratio =Fixed asset /sales at 100% capacity

                                      = 800,000,000/2,500,000,000

                                      = .32

c)Increased sales = 2,000,000,000(1+.35)= 2,700,000,000

Target Fixed asset /sales Ratio =Fixed asset /sales at 100% capacity

.32 = Fixed asset /2,700,000,000

Fixed asset = .32*2,700,000,000

                = $ 864,000,000

Increase in fixed asset = Target fixed asset - Current fixed asset

                                     = 864,000,000 - 800,000,000

                                     = $ 64,000,000