# 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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