Pierce Furnishings generated $2 million in sales during 2011, and its year-end t
ID: 2686300 • Letter: P
Question
Pierce Furnishings generated $2 million in sales during 2011, and its year-end total assets were $1.2 million. Also, at year-end 2011, 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 2012, the company estimates that its assets must increase by $0.60 for every $1.00 increase in sales. Pierce's profit margin is 7%, and its retention ratio is 40%. How large of a sales increase can the company achieve without having to raise funds externally?Explanation / Answer
Given
S2005 = $2,000,000
A2005 = $1,200,000
CL2005 = $500,000
NP2005 = $200,000
A/P2005 = $200,000
Accrued liabilities2005 = $100,000
A*/S0 = 0.60
PM = 7%
RR = 40%
AFN= (A*/S0)S – (L*/S0)S – MS1(RR)
$0 = (0.60)S – ($300,000 / $2,000,000)S - (0.07) (S1)(0.4)
$0 = (0.45)S - (0.028)S1
$0 = (0.45)(S1 - S0) - (0.028)S1
$0 = (0.45)(S1 - $2,000,000) - (0.028)S1
$0 = (0.45)S1 - $900,000 - (0.028)S1
S1 = $2132701
S1 - S0 = $2,132,701 - $2,000,000 = $132701