Question

SALES INCREASE Paladin Furnishings generated $2 million in sales during 2016, and its year-end total assets were $1.7 million. Also, at year-end 2016, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets must increase by $0.85 for every $1.00 increase in sales. Paladin's profit margin is 6%, and its retention ratio is 35%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent. $

Answer 1

Equation for AFN:-

AFN = (Total assets of 2016)*(% increase in Sales) - (Spontaneous Liabilities of 2016)*(% increase in Sales) - (Forecasted Sales of 2017)(Net Profit Margin)(Retention Ratio)

Spontaneous Liabilities of 2016 = Accounts Payable + Accrued liabilities

= $ 200,000 + $ 100,000 = $ 300,000

Total assets of previous year = $ 1.7 million

Forecasted sales = Sales of 2016(1+% increase)

= $ 2 million(1+X)

Net Profit Margin = 6%

Retention Ratio = 35%

Let the %increase in Sales be X

As assets must increase by $0.85 for every $1.00 increase in sales ,i.e., 85% increase in assets of 100% increase in sales.

So, %increase in assets = 85%of X

= 0.85X

As nothing is specifically mentioned about Spontaneous Liabilities, thus it will increase by same % as of Sales.

The company does not wants to raise funds externally, THUS AFN will be Zero.

0 = ($ 1.7 million)(0.85X) - ($ 300,000)(X) - [$ 2 million(1+X)](6%)(0.35)

0= $ 1445,000X - $ 300,000X - [$ 2,000,000 + $ 2000,000X)](6%)(0.35)

0 = 1145,000X - 42,000 - 42,000X

42,000 = 1103,000X

X = 3.8078

So, % increase in sales = 3.8078

Forecasted sales = Sales of 2016(1+% increase)

= $ 2 million(1+3.8078%)

= $ 2,076,156

So, the large amount of a sales increase can the company achieve without having to raise funds externally is $ 2,076,156

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