Question

1. Last year LaCroix Optical had $145 million of sales, and it had $40 million of fixed assets that were used at 75% of capacity. Use this information to solve the next two problems.
   

1. (10 points) In millions, by how much could LaCroix Optical sales increase before it is required to increase its fixed assets?
   
   
   
2. (10 points) LaCroix Optical was approached by the Department of Defense (DoD)because of their ability to manufacture the lens required for night vision goggles. LaCroix Optical is the last remaining firm domiciled in the United States that can manufacture the night vision lens, and subsequently the DoD designated the company as essential critical infrastructure. The company’s sales are expected to approximately double after signing a DoD contract. How much additional financing will LaCroix Optical need?     

Answer 1

Given,

Sales = $145 million

Fixed assets = $40 million

Capacity utilisation at 75%

Answer 1)

In millions, by how much could LaCroix Optical sales increase before it is required to increase its fixed assets?

At 75% utilisaiton firm can manage to geenrate $145 million,

75% utilisation = $145 million

100% utilisation = ?

Sales at 100% utilisation = 145 * (100%/75%)

Sales at 100% utilisation = $193.33 million

Answer 2)

Net Fixed Asset Turnover = Sales / Net Fixed Asset

Net Fixed Asset Turnover = 145 / 40

Net Fixed Asset Turnover =4.83

To double the sales, it means firm has to generate $290 million sales and it is operating at 75% utilisation and at 100% utilisation it is generating $193.34 million sales

Therefore remaining sales = 290 - 193.34 = 96.67

Which is 50%(96.67/193.34) of net sales at 100% utilisation, therefore it need increase the fixed assets by 50% hence it need to add $20 miilions in fixed assets which can be financed by debt or equity.