5. Excess capacity adjustments Aa Aa Monk Consortium Corp. (Monk-Con) currently

Question

5. Excess capacity adjustments Aa Aa Monk Consortium Corp. (Monk-Con) currently has $610,000 in total assets and sales of $1,820,000. Half of Monk-Con'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 evel of sales is Monk-Con was using its fixed assets at only 93% of capacity last year. How much sales could the firm have supported last year with its current level of fixed assets? $2,054,838 O $1,956,989 O $2,250,537 O $1,565,591 When you consider that Monk-Con's fixed assets were being underused, its target fixed assets to sales ratio should be When you consider that Monk-Con's fixed assets were being underused, how much fixed assets must Monk-Con raise to support its expected sales for next year? O $45,860 O $34,395 O $43,950 O $38,217

Explanation / Answer

Answer :-

Amount of additional Assets required to support 21% increase in the sales according to AFN equation

AFN = (Fixed Assets / current sales ) * Increase in the sales - (Liability / current sales ) * Increase in the sales - (Retained earning / current sales ) * Increase in the sales

AFN = (305000/1820000) * .21

AFN = 64050

Additional Fixed assets required will be 64050.

Answer :-

Monk - con uses the assets at 93 % capacity , then the amount of sales the firm will supports at the current level of fixed assets :-

Sales at the current level of fixed assets is 1820000 which is only 93% utilisation of fixed assets , but if the firm operates at 100% capacity then the sales will be (1820000/93%) *100% = 1956989 = option 2

Answer

Assets turnover ration = sales / fixed assets

at the current level the assets turnover ration is sales / Fixed assets = 1820000/305000 = 5.97 = this is equivalent to 93% capacity utilization , therefore if the firm operates at 100 % then assets turnover ration will be =

(5.97/93%) * 100% = 6.42

Answer :- calculation of how much addtional fixed assets will be required to sustain expected sales next year at 93% capacity utilisation

The sales of 1820000 requires fixed assets of 305000

then sales of 2202200 requires fixed assets of (305000/1820000) * 2202200 = 369050

At 93% capacity utilisation 369050 * 93% = 343217

Addtional fixed assets requires = 343217-305000 = 38217 = option 4

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.