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 $1.2 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 $0.60 for every $1.00 increase in sales. Pierce's profit margin is 7%, and its retention ratio is 45%. 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

During 2012,

Sales = S0 = $2,000,000

Total assets = $1,200,000

Accounts payable = $200,000

Accrued liabilities = $100,000

Assets/Sales = $1,200,000/$2,000,000 = 0.6

(Accounts payable +Accruals)/Sales = ($200,000 + $100,000)/$2,000,000 = 0.15

Retention ratio = 45% = 0.45

Profit margin = 7% = 0.07

Additional funds needed = 0.6 X Change in sales - 0.15 X Change in sales - 0.07 X New sales X 0.45

0.45 change in sales - 0.0315 New sales

Change in sales = New sales - Old sales, i.e, S1 - S0

New sales = S1

0.45 X (S1 -S0) - 0.0315 S1

0.45 S1 - 0.45S0 - 0.0315 S1

0.4185 S1 - 0.45 X $2,000,000

0.4185 S1 - $900,000

0.4185 S1 = $900,000

S1 = $900,000/0.4185

S1 = $2,150,538

Sales Increase = S1 - S0 = $2,150,538 - $2,000,000 = $150,537.6

Sales can increase by $150,537.6 without additional funds being needed.

Note:

Accounts payable and accruals are also proportional to sales

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