Carlsbad Corporation\'s sales are expected to increase from $5 million in 2016 t
ID: 2821540 • Letter: C
Question
Carlsbad Corporation's sales are expected to increase from $5 million in 2016 to $6 million in 2017, or by 20%. Its assets totaled $4 million at the end of 2016. Carlsbad is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2016, current liabilities are $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities. Its profit margin is forecasted to be 6%, and the forecasted retention ratio is 45%. Use the AFN equation to forecast the additional funds Carlsbad will need for the coming year. Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.
Explanation / Answer
We have
Additional Funds Needed = (A0/S0*(S1-S0)) - (L0/S0*(S1-S0)) - (PM*S1*b)
where
Ao - Assets (at time 0) which vary directly with Sales = 4 million
Lo - Liabilities (at time 0) which vary directly with Sales=1 million
So - Current Sales =5 million
S1 - Projected Sales = 6 million
b - Retention ratio = 45%
PM - Profit Margin = 6%
Additional Funds Needed = (4 million/5 million*(6 million-5 million)) - (1 million/5 million(6 million-5 million)) - (.06*6 million*.45
= 800,000 - 200,000 - 162,000
= 438,000
* Liabilities (at time 0) which vary directly with Sales usually includes accounts payable, notes payable, and accrued liabilities.