Sales increase Pierce Furnishings generated $2 million in sales during 2012, and

Question

Sales increase

Pierce Furnishings generated $2 million in sales during 2012, and its year-end total assets were $1.4 million. Also, at year-end 2012, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2013, the company estimates that its assets must increase by $0.70 for every $1.00 increase in sales. Pierce's profit margin is 7%, and its retention ratio is 60%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent.

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Explanation / Answer

Net Asset of the ompany

= total assets - current liabilities

= 1400000 - (500000 + 200000 + 200000 + 100000)

= $400000

Sales for the year 2012 = $2000000

profit margin = 7%

Profit for the year 2012 = 2000000 x 7% = $140000

Retaind profit = Profit for the year x retention ratio = $140000 x 60%= $84000

The asset must increase by $0.70 for every increase in sales by $1.00

So using the retained earning as the only source of finance, that is without raising the funds, for the expansion, from outside, the firm can increase its sales by:

(Retained Earnings / $ 0.7) x $1

= ($84000 /$ 0.7)x $1

= $120000

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