Sales increase Pierce Furnishings generated $4 million in sales during 2012, and

Question

Sales increase

Pierce Furnishings generated $4 million in sales during 2012, and its year-end total assets were $2.6 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 $0.65 for every $1.00 increase in sales. Pierce's profit margin is 6%, and its retention ratio is 50%. 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.

$  

Explanation / Answer

Solution:

Self-supporting growth (g) = [M * (1-payout ratio) * S0] / [A0 - L0 - (M * (1-payout ratio) * S0)]

M = profit margin,

(1-payout ratio) = retention ratio,

S0 = current level of sales,

A0 = current level of assets,

L0 = current level of liabilities,

PM = required profit margin.

g = [6% * 50% * 4,000,000] / [2,600,000 - (200,000 + 100,000) - (6% * 50% * 4,000,000)]

= 120,000 / [2,300,000 - 120,000]

= 120,000 / 2,180,000

= 0.06

g = 6%.

Thus,

Sales increase = S0 * g

Sales increase = 4,000,000 * 6%

                      = 220,183

Sales increase that can be achieved without raising funds externally is of $220,183.

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