Problem 9-4 Sales Increase Maggie\'s Muffins, Inc., generated $2,000,000 in sale

Question

Problem 9-4
Sales Increase

Maggie's Muffins, Inc., generated $2,000,000 in sales during 2015, and its year-end total assets were $1,300,000. Also, at year-end 2015, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2016, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 4%, and its payout ratio will be 60%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate? Do not round intermediate steps. Round your answers to the nearest whole.

Sales can increase by $_______ , that is by_______ %.

Explanation / Answer

Calculation of self-supporting growth rate=M*(1-POR)*S0/(A0-L0-M*(1-POR)*S0)

M=Net Income/Sales=4%

POR=payout ratio=60%

S0=Sales=2000000

A0=1300000

L0=Spontaneous Liabilities=Accounts Payable+Accruals=500000+200000=700000

hence, we get sustainabale growth rate=M*(1-POR)*S0/(A0-L0-M*(1-POR)*S0)=4%*(1-60%)*2000000/(1300000-700000-4%*(1-60%)*2000000)=0.05633=5.633%

Hence, additional sales=2000000*5.633%=112660

So, sales can increase by $112660, that is by 5.633%

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