Question

Beasley Industries' sales are expected to increase from $5 million in 2013 to $6 million in 2014, or by 20%. Its assets totaled $3 million at the end of 2013. Beasley is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2013, current liabilities are $760,000, consisting of $160,000 of accounts payable, $500,000 of notes payable, and $100,000 of accrued liabilities. Its profit margin is forecasted to be 4%, and its dividend payout ratio is 50%. Using the AFN equation, forecast the additional funds Beasley will need for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.
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Mitchell Manufacturing Company has $1,000,000,000 in sales and $200,000,000 in fixed assets. Currently, the company's fixed assets are operating at 70% of capacity.

1. What level of sales could Mitchell have obtained if it had been operating at full capacity? Round your answer to the nearest dollar. Do not round intermediate calculations.
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2. What is Mitchell's Target fixed assets/Sales ratio? Round your answer to two decimal places. Do not round intermediate calculations.
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3. If Mitchell's sales increase by 60%, how large of an increase in fixed assets will the company need to meet its Target fixed assets/Sales ratio? Round your answer to the nearest dollar. Do not round intermediate calculations.
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Answer 1

Solution to PART-1

Expected Next Year Sales = $6,000,000

After Tax profit Margin

After Tax profit Margin = Expected Next Year Sales x Profit Margin

= $6,000,000 x 4.00%

= $240,000

Dividend Paid

Dividend Paid = After Tax profit Margin x Dividend payout ratio

= $240,000 x 50%

= $120,000

Additions to Retained Earnings

Additions to Retained Earnings = After Tax profit Margin – Dividend paid

= $240,000 - $120,000

= $120,000

Increase in Total Assets

Increase in Total Assets = Total Assets x Percentage of Increase in sales

= $3,000,000 x 20%

= $600,000

Increase in Spontaneous liabilities

Increase in Spontaneous liabilities = [Accounts Payable + Accruals] x Percentage of Increase in sales

= [$160,000 + $100,000] x 20%

= $260,000 x 20%

= $52,000

Additional Funds Needed [AFN] for the coming year

Therefore, the Additional Funds Needed [AFN] = Increase in Total Assets – Increase in in Spontaneous liabilities – Additions to retained earnings

= $600,000 - $52,000 - $120,000

= $428,000

“Hence, the Additional Funds Needed (AFN) need for Beasley for the coming year will be $428,000”

Solution to PART-2

Requirement-(a), Full Capacity Sales

Full Capacity Sales = Current Sales / Percentage capacity of operation

= $1,000,000,000 / 0.70

= $1,428,571,428.57

Requirement (b), Target fixed assets/sales ratio

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

= [$200,000,000 / $1,428,571,428.57] x 100

= 14.00%

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

New Sales = $1,600,000,000 [$1,000,000,000 x 160%]

Sales at full capacity = $1,428,571,428.57

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

= [$1,600,000,000 - $1,428,571,428.57] x 14.00%

= $171,428,571.43 x 14.00%

= $24,000,000