Question

Paladin Furnishings generated $2 million in sales during 2016, and its year-end total assets were $1.4 million. Also, at year-end 2016, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets must increase by $0.70 for every $1.00 increase in sales. Paladin's profit margin is 5%, and its retention ratio is 30%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

a. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Calculation of Self-supporting Growth Rate

Current Year Sales = $2,000,000

Profit Margin = 5.00%

Retention Ratio = 30%

Total Spontaneous Liabilities = $300,000 [$200,000 + $100,000]

Last Year Total Assets = $1,400,000

Therefore, the Self-supporting Growth Rate = Addition to Retained Earnings / [Total Assets – Total Spontaneous Liabilities - Addition to Retained Earnings]

= [Last year sales x Profit Margin x Retention Ratio] / [Total Assets – Total Spontaneous Liabilities – (Last year sales x Profit Margin x Retention Ratio)]

= [$2,000,000 x 0.05 x 0.30] / [$1,400,000 - $300,000 – ($2,000,000 x 0.05 x 0.30)]

= $30,000 / [$1,400,000 - $300,000 - $30,000]

= $30,000 / $1,070,000

= 0.02803738 or

= 2.803738%

Therefore, the Increase in sales that the company can achieve without having to raise funds externally = Last Year Sales x Self-supporting Growth Rate

= $2,000,000 x 2.803738%

= $56,074.77

“Hence, the Increase in Sales would be $56,074.77”