Question

EXCESS CAPACITY

Williamson Industries has $8 billion in sales and $2.6 billion in fixed assets. Currently, the company's fixed assets are operating at 95% of capacity.

A. What level of sales could Williamson Industries have obtained if it had been operating at full capacity? Write out your answer completely. For example, 25 billion should be entered as 25,000,000,000. Round your answer to the nearest cent.

$ __________

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

% ___________

C. If Williamson's sales increase 14%, 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. For example, 25 billion should be entered as 25,000,000,000. Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. Do not round intermediate calculations.

$______________

Answer 1

Solution:
a.	level of sales operating at full capacity	$8,421,052,631.58
Working Notes:
	level of sales operating at full capacity = Current sales / current operating capacity
		=$8,000,000,000/95%
		=$8,421,052,631.579
		=$8,421,052,631.58
b.	Williamson's target fixed assets/sales ratio   = 30.87%
Working Notes:
	Williamson's target fixed assets/sales ratio = Fixed asset / sales in full capacity
		=$2,600,000,000/$8,421,052,631.58
		=0.30875
		=30.875%
		=30.87%
C.	Required increase in fixed assets	$215,800,000
Working Notes:
	New sales = $8,000,000,000 x (1.14) =$9,120,000,000
	Williamson's target fixed assets/sales ratio   = 30.875%
	Sales at full capacity = $8,421,052,631.57895
	Investment in fixed assets required only above sales full capacity
	Required increase in fixed assets = target fixed assets/sales ratio x ( new sales - sales at full capacity)
		= 30.875% x ($9,120,000,000 - $8,421,052,631.57895)
		=$215,800,000
Please feel free to ask if anything about above solution in comment section of the question.