Question

Quantitative Problem 2: Mitchell Manufacturing Company has $1,800,000,000 in sales and $230,000,000 in fixed assets. Currently, the company's fixed assets are operating at 70% of capacity.

A.) 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. $

B.) What is Mitchell's Target fixed assets/Sales ratio? Round your answer to two decimal places. Do not round intermediate calculations. %

C.) If Mitchell's sales increase by 50%, 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.

Answer 1

Using the above information, we can calculate the desired results as follows

A) Sales = $ 1,800,000,000

Fixed Assets $ 230,000,000

Current operating capacity = 70%

This means that the sales that can be made using 70% capacity are $ 1,800,000,000

So the level of sales that could have been obtained if it had been operating at full capacity are

Sales at full capacity = (Current sales / current capacity)

= 1,800,000,000 / 70%

= $ 2,571,428,571.42

B) We can calculate the target fixed assets to Sales ratio by using the below formula:

= (Total fixed Assets / Sales at full capacity) * 100

= 230,000,000 / 2,571,428,571.42

= 8.94%

C) If the sales increase by 50% , the increase in fixed assets required will be as follows

Increase in Sales = Current Sales ( 1+50%)

= 1,800,000,000 * 1.50

= $2,700,000,000

So,the fixed assets increase will be

= Target fixed assets to Sales ratio * ( Increase in Sales - Sales at full capacity)

= 8.94% * ( 2,700,000,000 - 2,571,428,571.42)

= 8.94% * (128,571,429)

= $ 11,494,285.8

So, the fixed assets increase required if sales increase by 50% are $ 11,494,285.80

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