Calculation of Maximum Increase in Sales the Firm can Achieve

Question

Assets

Amount

25%

90% capacity of actual

Cash

50

62.5

45

Inventory

150

187.5

135

FA

600

750

540

Total

800

1000

720

Liability

Amount

25%

Accounts payable

100

125

90

Notes payable

100

125

90

long term Debt

350

434

477

Equity

250

250

250

800

1000

Reserves and Surplus

0

66

47

Particulars

Amount

25%

90% of actual

Sales

800

1000

720

Cost

600

750

540

Profit

200

250

180

Taxes

68

85

61

132

165

119

Calculate:

a)

i) External finance if sales increased by 25% :

ii) Firm is producing at only 90% capacity

b) Suppose the firm wishes to maintain a constant debt-equity ratio, retains 60% of net income, and raises no new equity. Assets and costs maintain a constant ratio to sales.   What is the maximum increase in sales the firm can achieve?

Summary

This question belongs to accounting and discusses about assets and costs maintain a constant ratio to sales and maximum increase in sales of a firm.

Total word count: 305

 

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