Question

Sales Increase

Maggie's Muffins Bakery generated $2,000,000 in sales during 2016, and its year-end total assets were $1,400,000. Also, at year-end 2016, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2017, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 6%, and its payout ratio will be 55%. How large a sales increase can the company achieve without having to raise funds externally—that is, what is its self-supporting growth rate? Do not round intermediate calculations. Round your answers to the nearest whole.

Question:

Sales can increase by

① $    ,

② that is　by    %

Answer 1

Calculation of Self-supporting Growth Rate

Current Year Sales = $2,000,000

Profit Margin = 6.00%

Retention Ratio = 45% [100% - 55%]

Total Spontaneous Liabilities = $700,000 [$500,000 + $200,000]

Last Year Total Assets = $1,400,000

Therefore, the Self-supporting Growth Rate = Addition to Retained Earnings / [Total Assets – Total Spontaneous Liabilities - Addition to Retained Earnings]

= [Last year sales x Profit Margin x Retention Ratio] / [Total Assets – Total Spontaneous Liabilities – (Last year sales x Profit Margin x Retention Ratio)]

= [$2,000,000 x 0.06 x 0.45] / [$1,400,000 - $700,000 – ($2,000,000 x 0.06 x 0.45)]

= $54,000 / [$1,400,000 - $700,000 - $54,000]

= $54,000 / $646,000

= 0.08359133 or

= 8.359133%

Therefore, the Increase in sales that the company can achieve without having to raise funds externally = Last Year Sales x Self-supporting Growth Rate

= $2,000,000 x 8.359133%

= $167,183

Therefore, the

Sales can increase by

① $167,183,

② that is by 8.359133%