Pierce Furnishings generated $2 million in sales during 2014, and its year-end t
ID: 2722298 • Letter: P
Question
Pierce Furnishings generated $2 million in sales during 2014, and its year-end total assets were $1.1 million. Also, at year-end 2014, 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 2015, the company estimates that its assets must increase by $0.55 for every $1.00 increase in sales. Pierce's profit margin is 7%, and its retention ratio is 50%. How large of a sales increase can the company achieve without having to raise funds externally?
Explanation / Answer
Sales = $2,000,000
Assets = $1,100,000
Retention Ratio = 50%
Profit Margin = 7%
Spontaneous liabilities = 200,000(Account Payable) + 100,000(Accrued Liabilities) = 300,000
Self Supporting Growth Rate = (profit Margin*Retention Ratio*Sales) / (Assets-Spontaneous liabilities-(profit Margin*Retention Ratio*Sales))
= (0.07*0.5*2,000,000) / (1,100,000-300,000-(0.07*0.5*2,000,000))
= 0.09589
Increase in Sales = 0.09589 * 2,000,000
= $191,780