Problem 12-4 Sales Increase Maggie\'s Muffins, Inc., generated $4,000,000 in sal
ID: 2769051 • Letter: P
Question
Problem 12-4
Sales Increase
Maggie's Muffins, Inc., generated $4,000,000 in sales during 2013, and its year-end total assets were $2,200,000. Also, at year-end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2014, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 6%, and its payout ratio will be 40%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate? Do not round intermediate steps. Round your answers to the nearest whole.
Sales can increase by $ ,
that is by %.
Explanation / Answer
Answer: Step 1: Calculation of self-supporting growth rate
Formula: Self-supporting growth rate = M (1-POR) (S0)/ A0 – L0 – M (1-POR) (S0)
Where: M = Net Income/Sales = 6%
POR = Payout ratio = 40%
S0 = Sales = $4,000,000
A0 = $2,200,000
L0 = Spontaneous liabilities = $500,000+$200,000 = $700,000 [only the accounts payable and accruals are considered spontaneous liabilities]
Substituting in the above equation, we get:
.06 (1 - .40) (4,000,000)/ 2,200,000-700,000 - .06(1-.40)(4,000,000)
=144000/ 2,200,000 – 700,000 – 144,000
=144,000 /1,356,000
=10.6195%
Therefore, the self-sustaining growth rate is 10.6195%.
Step 2: Calculation of “how large a sales can increase” amount:
=Sales amount * Self-sustaining growth rate
=$4,000,000 * 10.6195%
=$424780
Therefore, sales can increase by $424780.