Question

Earleton Manufacturing Company has $2 billion in sales and $900,000,000 in fixed assets. Currently, the company's fixed assets are operating at 80% of capacity.

1. 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.
   $  
2. 
   
3. What is Earleton's target fixed assets/sales ratio? Do not round intermediate calculations. Round your answer to two decimal places.
   %
4. 
   
5. If Earleton's sales increase 40%, 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

Earleton Manufacturing Company has $2 billion in sales and $900,000,000 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?

Level of sales of Earleton if it is operating at full capacity = Actual Sales / present operating capacity

= $2 billion / 80%

= $2,000,000,000/0.90 = 2500000000.00

b. What is Earleton's target fixed assets/sales ratio?

Target fixed assets/sales ratio

= Actual fixed assets of company /Full capacity sales of company

= $900,000,000 / 2500000000

= 0.3600 or 36.00%

c. If Earleton's sales increase 40%, how large of an increase in fixed assets will the company need to meet its target fixed assets/sales ratio?

Required level of fixed asset = (target fixed asset/Sales) * Projected sales

= (36.00%) * $2 billion * (1 +40%)

= 0.360 * $2,800,000,000

=$1,008,000,000

Therefore an increase in fixed assets = Required level of fixed asset – initial fixed asset

= $1,008,000,000 - $900,000,000

= $108,000,000