Pierce Furnishings generated $4 million in sales during 2012, and its year-end t
ID: 2716149 • Letter: P
Question
Pierce Furnishings generated $4 million in sales during 2012, and its year-end total assets were $2.4 million. Also, at year-end 2012, 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 2013, the company estimates that its assets must increase by $0.60 for every $1.00 increase in sales. Pierce's profit margin is 4%, and its retention ratio is 60%. How large of a sales increase can the company achieve without having to raise funds externally?
Explanation / Answer
Current Retained Earning = 4,000,000*4%*60%
Current Retained Earning = 96000
%Increase in Asset Percentage to sale = 2.4/4 = 60%
% Increase in spontaneous liability to sale = (200000+100000)/4000000 = 7.5%
% of retention ratio = 60%
Profit margin ratio = 4%
Increase in sale = Current Retained Earning/(%Increase in Asset Percentage to sale -% Increase in spontaneous liability to sale - % of retention ratio *Profit margin ratio )
Increase in sale = 96000/( 60% - 7.5%- 4%*60%)
Increase in sale = $ 191,617
Alternatively
Additional Fund Needed = ( Asset/Sales)*Change in Sale - (Spontaneous Current liablity/Sale)*change in sale - (profit Margin* Expected sale*retention ratio
0 = 0.60* ( Expected sale - 4000000) - (300000/4000000)* ( Expected sale - 4000000) - (4%*Expected sale*60%)
0 = 0.6 Expected sale - 2400000 - 0.075*Expected sale + 300000 - 0.024 Expected sale
0 = 0.501 Expected sale - 2100000
Expected sale = 2100000/0.501
Expected sale = $ 4,191,617
Increase in sale in next year can the company achieve without having to raise funds externally = Expected Sale - Current Sale
Increase in sale in next year can the company achieve without having to raise funds externally = 4,191,617 - 4000000
Increase in sale in next year can the company achieve without having to raise funds externally = $ 191,617