Newtown Propane currently has $540,000 in total assets and sales of $1,790,000.

Question

Newtown Propane currently has $540,000 in total assets and sales of $1,790,000. Half of Newtown's total assets come from net fixed assets, and the rest are current assets. The firm expects sales to grow by 22% in the next year. Acording to the AFN equation, the amount of additional assets required to support this level of sales is Newtown was using its fixed assets at only 95% of capacity last year. How much sales could the firm have supported last year with its current level of fixed assets? $2,166,843 $2,072,632 $1,884,211 $1,507,369 When you consider that Newtown's fixed assets were being underused, its target fixed assets to sales ratio should be When you consider that Newtown's fixed assets were being underused, how much fixed assets must Newtown raise tc support its expected sales for next year?

Explanation / Answer

Additional Assets required to support this level of sales=(%sales growth)*Total Assets

Additional Assets required to support this level of sales=(22%)*540,000

Additional Assets required to support this level of sales=$118,800

With .95*Fixed Assets, Sales=1,790,000

With total Fixed Assets, Sales=$1,790,000/0.95=$1,884,211(sales with current level of full capacity)

Target fixed assets to sales ratio should be=fixed Assets/Sales with full capacity

Target fixed assets to sales ratio should be=0.5*540,000/1,884,211

Target fixed assets to sales ratio should be=0.1433(14.33%)

.95*0.5*540,000 of fixed assets are generating sales=1,790,000(as fixed assets are underused at 95% capacity)

To generate 1.22*1,790,000 of sales, fixed assets required=.95*0.5*540,000*(1.22*1,790,000/1,790,000)=312,930

Total fixed assets to raise=312,930-0.5*540,000=$42,930

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