Calculation of Maximum Increase in Sales the Firm can Achieve

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Question

Assets	Amount	25%	90% capacity of actual
Cash	50	62.5	45
Inventory	150	187.5	135
FA	600	750	540
Total	800	1000	720
Liability	Amount	25%
Accounts payable	100	125	90
Notes payable	100	125	90
long term Debt	350	434	477
Equity	250	250	250
800	1000
Reserves and Surplus	0	66	47
Particulars	Amount	25%	90% of actual
Sales	800	1000	720
Cost	600	750	540
Profit	200	250	180
Taxes	68	85	61
132	165	119

Calculate:

i) External finance if sales increased by 25% :

ii) Firm is producing at only 90% capacity

b) Suppose the firm wishes to maintain a constant debt-equity ratio, retains 60% of net income, and raises no new equity. Assets and costs maintain a constant ratio to sales. What is the maximum increase in sales the firm can achieve?

Summary

This question belongs to accounting and discusses about assets and costs maintain a constant ratio to sales and maximum increase in sales of a firm.

Total word count: 305

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