Sales increase Pierce Furnishings generated $2 million in sales during 2014, and

Question

Sales increase Pierce Furnishings generated $2 million in sales during 2014, and its year-end total assets were $1.5 million. Also, at year-end 2014, 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 2015, the company estimates that its assets must increase by $0.75 for every $1.00 increase in sales. Pierce's profit margin is 7%, and its retention ratio is 30%. 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

Let the maximum percentage increase in sales be x.

Hence increase in assets and liabilities shall be 0.75x

Increase in total assets = $1,500,000 * 0.75x = $1,125,000x

Increase in liabilities = $500,000 * 0.75x = $375,000x

Increased sales = $2,000,000*(1+x)

Retained earnings = Increased sales * Profit margin * Retention ratio = $2,000,000 * (1+x) * 0.07 * 0.30 = $42,000*(1+x)

External fund needed = 0 = Increase in assets – Increase in liabilities – Retained earnings

$1,125,000x - $375,000x - $42,000 * (1+x) = 0

$750,000x - $42,000 - $42,000x = 0

$708,000x = $42,000

X = $42,000/$708,000 = 0.0593

Percentage increase in sales = 5.93%

Increase in sales = $2,000,000 * 5.93% = $118,600

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.