5. Excess capacity adjustments Aa Aa Newtown Propane had sales of $1,790,000 las

Question

5. Excess capacity adjustments Aa Aa Newtown Propane had sales of $1,790,000 last year on fixed assets of $345,000. Given that Newtown's fixed assets were being used at only 93% of capacity, then the firm's fixed asset turnover ratio was l How much sales could Newtown Propane have supported with its current level of fixed assets? O $1,732,258 O $2,213,441 o $1,636,021 o $1,924,731 when you consider that Newtown's fixed assets were being underused, what should be the firm's target fixed assets to sales ratio? 19.72% 20.62% 17.93% 21.52% Suppose Newtown is forecasting sales growth of 21% for this year. If existing and new fixed assets are used at 100% capacity, the firm's expected fixed-assets turnover ratio for this year is

Explanation / Answer

An answer to Part 1

Fixed Assets turnover ratio = Net sales / Avg. Fixed Assets ------------------------equation 1

Net sales = $1790000 (Given)

Fixed Assets =$ 345000(Given)

Put the values in the above equation 1

Fixed assets turnover ratio = 1790000/345000

= 5.19

An answer to Part 2

As given in question the existing capacity of assets used by Newtown propane = 93%

means $ 345000 fixed assets has not been fully utilized by Newtown propane.

At 93% capacity assets turnover of Newtown propane = 5.19

so at 100% capacity assets turnover could be = 5.19*100%/93%

= 5.58

Now by the help of assets turnover formula sales would be = Assets turnover at 100% capacity * last year fixed assets

= 5.58*345000

= 1924731

so the option (d) could be correct.

An answer to part 3

As question specifies that the fixed assets were underutilised to 93% it means fixed assets of $ 345000 should be used only to = 345000*93/100 = 320850 in favor of existing sales to $ 1790000.

so target fixed assets to sales ratio = 320850/1790000

= 17.93%

so the option (C) could be correct.

An answer to Part (d)

Existing sales = 1790000

growth in sales = 1790000*1.21 = 2165900-----------------------------(A)

sales support if existing assets will be 100% utilized = 1924731 (calculated in part 2)

Remaining amt. of sales to be covered = 2165900 - 1924731

= 241169

Fixed assets required to cover remaining sales = Remaining amt. of sales * Total fixed assets / Total sales at 100% utilization

of assets

= 241169*345000/1924731

= 43228.5

Total assets = Existing Fixed Assets + New Fixed Assets

= 345000 + 43228.5

= 388228.5 -------------------------------(B)

So Expected fixed-assets turnover ratio = Net sales / Avg. Fixed assets

= 2165900 (A) / 388228.5(B)

= 5.58

Note - Due to not availibility of avg. fixed assets we can use last year fixed assets as avg. fixed assets.

Please check with your answer and let me know.

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