Sales Increase Maggie\'s Muffins, Inc., generated $2,000,000 in sales during 201

Question

Sales Increase

Maggie's Muffins, Inc., generated $2,000,000 in sales during 2013, and its year-end total assets were $1,400,000. 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 4%, and its payout ratio will be 60%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate?

Sales can increase by $___? , that is by ___%.

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)–(($500,000+$200,000)/$2,000,000)×(S1-S0)–S1×4%×40%

$0 = ($1,400,000/$2,000,000)×(S1-$2,000,000)–($700,000/$2,000,000)×(S1-$2,000,000)–S1×1.60%

$0 = 0.7×S1-$1,400,000–0.35×S1+$700,000–S1×1.60%

$700,000 = S1×(0.7-0.35-0.016)

S1 = $2,095,808

Maximum sales increase = $95,808 ($2,095,808-$2,000,000)

Self supporting growth rate = 7.79% ($95,808/$2,000,000)

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