Question

Williamson Industries has $6 billion in sales and $2.8 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 13%, 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

a. An excess capacity adjustment needs to be done since the company is working at its full capacity

Sales = $6billion

Fixed assets = $2.8 billion

Current capacity if 95%

Full capacity sales = (Actual sales)/ (Percentage of full capacity) = 6billion / 0.95

Full capacity sales = 6,000,000,000 / 0.95

Full capacity sales = $6315789473.68

b. Target fixed assets to Sales ratio = Fixed assets / Full capacity sales = 6,000,000,000 / 6315789473.68

Target fixed assets to Sales ratio = 0.95

c. Sales increase by 13%

Increase in fixed-assets needed = IFA

Total sales after increase = Current sales * Sales increase = $6 billion * 1.13

Total sales after increase = 6,780,000,000

Here, no increase in fixed-assets is required till the sales reaches 6315789473.68 since the company is not operating at full capacity

IFA = Target fixed assts/sales ratio*(6,780,000,000-6,315,789,473.68) = 0.95* 6,780,000,000-6,315,789,473.68)

IFA= 125,210,526.32

Hence an increase of 125,210,526.32 in fixed assets the company will need to meet its target fixed assets/sales ratio