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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

EXCESS CAPACITY Edney Manufacturing Company has $2 billion in sales and $0 6 billion in fixed assets. Currently, the company’s fixed assets are operating at 80% of capacity.

a. What level of sales could Edney have obtained if it had been operating at full capacity?

b. What is Edney’s target fixed assets/sales ratio?

c. If Edney’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 determine: The level of sales, if company operating at full capacity.

Fixed Assets:

It refers to those assets, which are used for long period of time like plant and machinery, building, furniture and fixtures.

Explanation

Given,

Sales are $2 billion.

Fixed assets are $.6 billion.

Company’s fixed assets are operating at 80% capacity.

Fixedassetsturnoverratio=SalesNetfixedassets=$2billion$0.6billion=$3

b.

Summary Introduction

To determine: The level of the target fixed assets/sales ratio.

c.

Summary Introduction

To determine: The increase in fixed assets to meet the target ratio, if sales increases 30%.

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