Excess capacity Walter Industries has $5 billion in sales and $2 billion in fixe
ID: 2653275 • Letter: E
Question
Excess capacity
Walter Industries has $5 billion in sales and $2 billion in fixed assets. Currently, the company's fixed assets are operating at 95% of capacity.
What level of sales could Walter Industries have obtained if it had been operating at full capacity? Write out your answer completely. For example, 25 billion should be entered as 25,000,000,000. Round your answer to the nearest cent.
$ {C}
What is Walter's target fixed assets/Sales ratio? Round your answer to two decimal places.
%
If Walter's sales increase 14%, how large of an increase in fixed assets will the company need to meet its Target fixed assets/Sales ratio? Write out your answer completely. For example, 25 billion should be entered as 25,000,000,000. Round your answer to the nearest cent. Do not round intermediate calculations.
$
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Solution
Excess capacity
Walter Industries has $5 billion in sales and $2 billion in fixed assets. Currently, the company's fixed assets are operating at 95% of capacity.
What level of sales could Walter Industries have obtained if it had been operating at full capacity? Write out your answer completely. For example, 25 billion should be entered as 25,000,000,000. Round your answer to the nearest cent.
$ {C}
What is Walter's target fixed assets/Sales ratio? Round your answer to two decimal places.
%
If Walter's sales increase 14%, how large of an increase in fixed assets will the company need to meet its Target fixed assets/Sales ratio? Write out your answer completely. For example, 25 billion should be entered as 25,000,000,000. Round your answer to the nearest cent. Do not round intermediate calculations.
$
Explanation / Answer
Answer:
1. Sales at 95% of the capacity =$5,000,000,000
Hence Sales at 100% of the Capacity = $5,000,000,000 /95%
= $5,263,157,894
2. Target fixed assets/Sales ratio = Target Fixed Assets / Target Sales
= 2 Billion / 5 Billion
= 0.40
= 40.00 %
3. Sales after increase = 5 Billion * 114% = 5.7 Billion
Fixed Assets after increase = Sales after increase * Target fixed assets/Sales ratio
= 5.7 Billion *40% = 2.28 Billion
Hence Increase in Fixed Assets = 2.28 Billion – 2 Billion
= $280,000,000
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