Sales Increase MM Corp., generated $2,000,000 in sales during 2013, and its year

Question

Sales Increase

MM Corp., generated $2,000,000 in sales during 2013, and its year-end total assets were $1,700,000. Also, at year end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2014: the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 5%; and its pay-out ratio will be 50%. How large a sales increase can the company achieve without having to raise funds externally; that is - what is its self-supporting growth rate? Do not round intermediate steps. Round your answers to the nearest whole.

Sales can increase by $____, that is by _____ %.

Explanation / Answer

Additional Fund Needed = Assets at the end of 2013 * Increase in sales in 2014 / Sales in 2013 - Liabilities at the end of 2013 * Increase in sales in 2014 / Sales in 2013 - Sales in 2014 * Profit margin * Retention margin

As per the question, Additional fund needed = $0

Let, the increase in sales during 2014 be "S".

Therefore,

$0 = $1,700,000 * S / $2,000,000 - $1,000,000 * S / $2,000,000 - ($2,000,000 + S) * 5% * 50%

=> S = $153,900

As such the sales would increase by $153,900.

Now, % increase in sales = $153,900 / $2,000,000 * 100%

= 7.695%

Sales can increase by $153,900, that is by 7.695%

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