Pierce furnishings generated $2.0 million in sales during 2004, and its year-end
ID: 2668605 • Letter: P
Question
Pierce furnishings generated $2.0 million in sales during 2004, and its year-end total assets were $1.5 million. Also, at year-end 2004, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accruals. Looking ahead to 2005, the company estimates that its assets must increase by 75 cents for every $1 increase in sales. Pierces profit margin is 5 percent, and its payout ratio is 60 percent. How large a sales increase can the company achieve without having to raise funds externally.
Explanation / Answer
2005 estimated sales increase: Payout ratio= Net Income/Total Assets .6 = (2,000,000 + x).05/.75x .45x = 100,000 + 05x .40x = 100.000 = 100,000/.40 = 250,000 answer To prove: 2,250,000 x .05= 112,500 Profit margin estimate 250,000 x .75= 187,500 Increase of asset per $1 increase in sales 112,500/187,500 = .6 this is the payout ratio