3. Water and Power Co. (W&P) currently has $540,000 in total assets and sales of
ID: 2771699 • Letter: 3
Question
3. Water and Power Co. (W&P) currently has $540,000 in total assets and sales of $1,820,000. Half of W&P’s total assets come from net fixed assets, and the rest are current assets. The firm expects sales to grow by 21% in the next year. According to the AFN equation, the amount of additional assets required to support this level of sales is:
a) 113,400
b) 124,740
c) 136,080
d) 147,420
W&P was using its fixed assets at only 94.00% of capacity last year. How much sales could the firm have supported last year with its current level of fixed assets?
a) $1,645,745
b) $1,742,553
c) $1,839,362
d) $1,936,170
When you consider that W&P’s fixed assets were being underused, its target fixed assets to sales ratio should be:
a)11.160%
b) 12.555%
c)13.950%
d) 16.740%
When you consider that W&P’s fixed assets were being underutilized, W&P must raise _____________ in additional fixed assets to support its expected sales next year.
a)31,533
b)33,388
c)35,243
d)37,098
Explanation / Answer
Answer to Part 1:
According to the AFN equation, the amount of additional assets required to support this level of sales is:
Current Level of Assets * Percentage increase in sales
i.e., 540000* 0.21= $113400
Therefore, answer is a
Answer to Part 2:
Since fixed asset utilisation is 94% at 100% level total sales will be:
Total Fixed Asset = $ 540000/2 = $ 270000
Utilisation = $ 270000 * 94% = $ 253,800
Current Level of Sales= $1,820,000
Total sales at 100% Asset Utilisation= (1820000 / 253800) * 270000 = $ 1,936,170
Therefore, answer is d
Answer to Part 3:
Fixed Asset to Sales Ratio = Fixed Asset / Sales
Targeted Ratio = Fixed Assets / Targeted Sales
i.e., (270,000 / 1,936,100) * 100 = 13.950% (Approx)
Therefore, the answer is c
Answer to Part 4:
Targeted Sales Level = $ 1,820,000 * 121% = $ 2,202,200
Current Fixed Asset Utilisation = $ 253,800
Total Fixed Assets required for additional sales = Current Asset Utilisation Ratio * Targeted Sales
i.e., (253800 / 1820000) * 2,202,200 = $307,098
Hence, Additional fixed Asset Required are: $307,098 - $270000 = $ 37,098
Therefore, the answer is d
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