Quantitative Problem 2: Mitchell Manufacturing Company has $1,000,000,000 in sal

Question

Quantitative Problem 2: Mitchell Manufacturing Company has $1,000,000,000 in sales and $260,000,000 in fixed assets. Currently, the company's fixed assets are operating at 75% of capacity.

a.)What level of sales could Mitchell have obtained if it had been operating at full capacity? Round your answer to the nearest dollar. Do not round intermediate calculations.

b.) What is Mitchell's Target fixed assets/Sales ratio? Round your answer to two decimal places. Do not round intermediate calculations.

c.) If Mitchell's sales increase by 55%, how large of an increase in fixed assets will the company need to meet its Target fixed assets/Sales ratio? Round your answer to the nearest dollar. Do not round intermediate calculations.

Explanation / Answer

Part A)

The level of sales at full capacity can be derived with the use of following formula:

Level of Sales at Full Capacity = Current Sales Level/Current Operating Capacity*100

_______

Using the information provided in the question, we get,

Level of Sales at Full Capacity = 1,000,000,000/75%*100% = $1,333,333,333 (answer)

_______

Part B)

The Target Fixed Assets/Sales Ratio (we only need to substitute the figures provided in the question) has been calculated as follows:

Target Fixed Assets/Sales Ratio = 260,000,000/1,000,000,000 = .26 (answer)

_______

Part C)

Sales after Increase = Current Sales Level*(1+Expected Increase) = 1,000,000,000*(1+55%) = 1,550,000,000

Since, we need to achieve the Target Fixed Assets/Sales Ratio of .26, we can use the increased sales in the formula to get the value of fixed assets as shown below:

.26 = Revised Target Fixed Assets/1,550,000,000

Revised Target Fixed Assets = 1,550,000,000*.26 = $403,000,000

Increase in Fixed Assets = Revised Target Fixed Assets - Current Fixed Assets = 403,000,000 - 260,000,000 = $197,000,000 (answer)

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects