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 $1,400,000. 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 5%, 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

Sale in 2013 = $2,000,000

Total asset at end of 2013 = $1,400,000

Profit margin = 5%

Net profit in year 2013 = $2,000,000 ×5%

                                      = $100,000

So in year 2014 retained earnings which is a part of liability will also increase by the value of net income ion year 2016.

So total assets in year 2014 will increases by value of net income in year 2013.

So total asset in 2014 = $1,500,000

The company estimates that its assets must increase at the same rate as sales so sale in 2014 is calculated below:

Sale in 2014 = ($2,000,000 / $1,400,000) × $1,500,000

                     = $2,142,857

Increase in sale in year 2014 = $2,142,857 - $2,000,000

                                                = $142,857

Percentage increase in sale = $142,857 / $2,000,000

                                             = 7.143%

Hence, Sales is increase by $142,857 and by 7.143%.

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