Thorpe Mfg., Inc., is currently operating at only 96 percent of fixed asset capacity. Current sales...

Thorpe Mfg., Inc., is currently operating at only 96 percent of fixed asset capacity. Current sales are $610,000. Suppose fixed assets are $550,000 and sales are projected to grow to $643,000. How much in new fixed assets is required to support this growth in sales? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole number.)

Expert Solution

The key to solving this problem requires one to understand that sales growth needs to be supported by a commensurate (proportional) growth in fixed assets. As the current sales of $ 610000 are expected to grow to a projected level of $ 643000, the firm's fixed assets also need to grow by a commensurate amount to support this higher sales level. Further, the comparison of sales level should be done only when the firm operates at 100 % fixed assets capacity. In this case, one needs to first determine the full capacity sales level and then determine the % by which the full capacity sales need to increase so as to reach the projected sales level of $ 643000

The firm currently operates at 96 % capacity

Therefore, Full Capacity Sales = 610000 / 0.96 = $ 635416.7

Projected Sales = $ 643000

% Increase in Sales = [(643000 - 635416.7) / 635416.7] x 100 = 1.1934 %

Current Fixed Assets = $ 550000

New Level of Fixed Assets Required = 550000 x [1+% Change in Sales Level] = 550000 x (1.011934) = $ 556563.9 ~ $ 556564

jeff jeffy answered 1 year ago

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