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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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EXCESS CAPACITY Earleton Manufacturing Company has $3 billion in sales and $787,500,000 in fixed assets. Currently, the company’s fixed assets are operating at 80% of capacity.

  1. a. What level of sales could Earleton have obtained if it had been operating at full capacity?
  2. b. What is Earleton’s target fixed assets/sales ratio?
  3. c. If Earleton’s sales increase 30%, how large of an increase in fixed assets will the company need to meet its target fixed assets/sales ratio?

a.

Summary Introduction

To compute: The level of sales of E Company at full capacity.

Introduction:

Excess Capacity Adjustment:

The Company most of the time is not achieving the full capacity level, so the adjustment to this is needed. The changes made in the capacity to achieve optimum level are the excess capacity adjustment.

Explanation

Given information:

Sales are $3 billion.

Current capacity is 80%.

The formula to calculate the level of sales at full capacity is,

Fullcapacitysales=Actualsales(Percentageofcurrentcapacity)

b.

Summary Introduction

To compute: Target fixed asset sales ratio of E Company.

c.

Summary Introduction

To compute: The amount of fixed asset when sales increase by 30%.

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