Maggie\'s Muffins Bakery generated $2 million in sales during 2018, and its year

Question

Maggie's Muffins Bakery generated $2 million in sales during 2018, and its year-end total assets were $1.2 million. Also, at year-end 2018, current liabilities were $1 million, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2019, 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? Do not round intermediate calculations. Round the monetary value to the nearest dollar and percentage value to the nearest whole number.

Sales can increase by $   , that is by   %.

Explanation / Answer

Current Sales, S0 = $2,000,000
Current Total Assets, A0 = $1,200,000
Profit Margin, M = 4%

Current Spontaneous Liabilities, L0 = Accounts Payable + Accruals
Current Spontaneous Liabilities, L0 = $500,000 + $200,000
Current Spontaneous Liabilities, L0 = $700,000

Payout Ratio = 60%

Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.60
Retention Ratio, b = 0.40

Self-supporting Growth Rate = [M * b * S0] / [A0 - L0 - M * b * S0]
Self-supporting Growth Rate = [0.04 * 0.40 * $2,000,000] / [$1,200,000 - $700,000 - 0.04 * 0.40 * $2,000,000]
Self-supporting Growth Rate = $32,000 / $468,000
Self-supporting Growth Rate = 7%

Increase in Sales = $2,000,000 * 7%
Increase in Sales = $140,000

Sales can increase by $140,000, that is by 7%

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