Pierce Furnishings generated $2.0 million in sales during 2005, and its year-end

Question

Pierce Furnishings generated $2.0 million in sales during 2005, and its year-end total assets were $1.5 million. Also at year-end 2008, 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 2009, the company estimates that its assets must increase by $0.75 cents for every $1.00 increase in sales. Pierce's profit margin in 5%, and its retention ratio is 40%. How Large a sales increase can the company achieve without having to raise funds externally?

Explanation / Answer

5.333% so, every asset dollar yields a 1.33 dollar of sales every dollar of sales increase profits by 5 cents every dollar of profit increases reinvestment or assets by 60 cents 1 dollar of asset = 1.33 * 0.05 *.60 = 40 cents more of assets so 40% increase of assets annually, which means another 5.333% sales growth yearly

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