Problem 12-04 Sales Increase Maggie\'s Muffins Bakery generated $2,000,000 in sa
ID: 2796356 • Letter: P
Question
Problem 12-04
Sales Increase
Maggie's Muffins Bakery generated $2,000,000 in sales during 2016, and its year-end total assets were $1,400,000. Also, at year-end 2016, 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 2017, 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 4%, and its payout ratio will be 55%. 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 calculations. Round your answers to the nearest whole.
Sales can increase by $ , that is by %.
Explanation / Answer
Self sustaining growth rate=(Profit margin*(1-payout ratio)* current sales)/(Current assets-current liabilites-(Profit margin*(1-payout)*current sales))
Profit margin=4%
1-payout=1-55%=0.45
Current sales=2000000
Current assets=1400000
Current liabilites=500000+200000=700000
growth rate=(4%*0.45*2000000)/(1400000-700000-(4%*0.45*2000000))
=5.42%
Sales can be increased by =2000000*5.42%=108434