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 $1.4 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 $0.70 for every $1.00 increase in sales. Pierce's profit margin is 7%, and its retention ratio is 35%. 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

AFN = (A/S0)S–(L/S0)S–MS1(RR)

A- Assets tied directly to sales

L-spontaneous liabilities that are affected by sales

S0=the previous year's sales

S1=total projected sales for next year

S=the change in sales between S0 and S1

MS1=projected net income

RR=the retention ratio from net income

$0 = ($1,400,000/$2,000,000)×(S1-S0)–(($200,000+$100,000)/$2,000,000)×(S1-S0)–S1×7%×35%

$0 = ($1,400,000/$2,000,000)×(S1-$2,000,000)–($300,000/$2,000,000)×(S1-$2,000,000)–S1×2.45%

$0 = 0.7×S1-$1,400,000–0.15×S1+$300,000–S1×2.45%

$1,100,000 = S1×(0.7-0.15-0.0245)

S1 = $2,093,244

Maximum sales increase = $93,244 ($2,093,244-$2,000,000)

Self supporting growth rate = 7.66% ($93,244/$2,000,000)

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