Gainesville Surgicenter Inc. is a large, ambulatory surgery center owned by a gr

Question

Gainesville Surgicenter Inc. is a large, ambulatory surgery center owned by a group practice of surgeons

Balance Sheet as of December 31, 2010 (Thousands of dollars)
Cash $1,800 Accounts payable $7,200
Receivables $10,800 Notes payable $3,472
Inventories $12,600 Accruals $2,520
Total current assets $25,200 Total current liabilities $13,192
Net fixed assets $21,600 Mortgage bonds $5,000
Common stock $2,000
Retained earnings $26,608
Total assets $46,800 Total liabilities & equity $46,800

Income Statement for 2010 (Thousands of dollars)
Revenues $36,000
Operating costs $30,783
Earnings before interest and taxes $5,217
Interest $1,017
Earnings before taxes $4,200
Taxes (40%) $1,680
Net income $2,520
Dividends (60%) $1,512
Addition to retained earnings $1,008

a. Assume that the company was operating at full capacity in 2010 with regard to all items except fixed
assets (operating rooms and support space); fixed assets in 2010 were utilized to only 75 percent of
capacity. By what percentage could 2011 revenues increase over 2010 revenues without the need for an
increase in fixed assets?
b. Now suppose 2011 revenues increase by 25 percent over 2010 revenues. Use the constant growth
method to develop a pro forma balance sheet and income statement as in Table 14.3. Assume that
Gainesville cannot sell any fixed assets and that any financing required is borrowed as notes payable at
an interest rate of 12 percent.

Explanation / Answer

capacity sales = actual revenue /utilization revenue = 36000/0.75 = 48000

percentage increase = 48000-36000/36000 = 33%

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