Maggie\'s Muffins, Inc., generated $2,000,000 in sales during 2013, and its year

Question

Maggie's Muffins, Inc., generated $2,000,000 in sales during 2013, and its year-end total assets were $1,300,000. 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 3%, and its payout ratio will be 45%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate? Do not round intermediate steps. Round your answers to the nearest whole.

Sales can increase by $_______ , that is by ________%.

Explanation / Answer

Step 1: Calculate Self-Supporting Growth Rate

The formula for calculating self-supporting growth rate is give n below:

Self-Supporting Growth Rate = [Profit Margin*(1-Payout Ratio)*Current Sales]/(Total Assets - Spontaneous Liabilities - Profit Margin*(1-Payout Ratio)*Current Sales)

Using the values provided in the question, we get,

Self-Supporting Growth Rate = [3%*(1-45%)*2,000,000]/[1,300,000 - 700,000 - 3%*(1-45%)*2,000,000]

Solving further, we get,

Self-Supporting Growth Rate = 33,000/567,000 = 5.82011% or 6% (if rounded off)

________

Step 2: Calculate Increase in Sales Without Raising Fund Externally

The increase in sales that can be achieved without having to raise funds externally is calculated below:

Increase in Sales = Current Sales*Self-Supporting Growth Rate = 2,000,000*5.82% = $116,402 or $120,000 (if we take 6% as Self-Supporting Growth Rate)

Sales can increase by $116,402 or $120,000, that is by 5.82% or 6%.

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