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 $1,700,000. 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 7%, and its payout ratio will be 65%. 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

Change in sale

Sale in 2013 = $2,000,000

Total asset at end of 2013 = $1,700,000

Profit margin = 7%

Net profit in year 2013 = $2,000,000 ×7%

                                      = $140,000

Payout ratio = 65%

Retention ratio = 35%

Increase in retained earning = $140,000 × 35%

                                             = $49,000

So in year 2014 retained earnings which is a part of liability will also increases by $49,000.

Total value of liability = $1,000,000

Value of equity = $700,000

Percentage increases in liability over one year period = $49,000 / 700,000

                                                                                      = 7%

So total value of spontaneous liability will also increase by 7%.

Total value of assets in 2014 = $1,700, 000 × (1 + 7%)

                                               = $1,819,000

.

So total asset in 2014 = $1,819,000

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 / $1,700,000) × $1,819,000

                     = $2,140,000

Increase in sale in year 2014 = $2,140,000 - $2,000,000

                                                = $140,000

Percentage increase in sale = $140,000 / $2,000,000

                                             = 7%

Hence, Sales is increase by $140,000 and by 7%.

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