Question

Last year Stokes Technologies had $350 million of sales and $150 million of fixed assets, so its Fixed Assets/Sales ratio was 42.86%. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What target Fixed Assets/Sales ratio should the company set? Show your calculations, if any, and explain your answer.

Answer 1

0.3215 or 32.15%

Explanation:

Data provided in the question:

Sales by Stokes Technologies = $350 million

fixed assets = $150 million

Fixed Assets/Sales ratio = 42.86%

capacity = 75%

Now,

Sales at full capacity =
`\frac{\textup{Sales}}{\textup{capacity }}`

or

Sales at full capacity =
`\frac{\textup{350 million}}{\textup{75}\%}`

or

Sales at full capacity =
`\frac{\textup{350 million}}{\textup{0.75}}`

or

Sales at full capacity = $466.67 million

Thus,

Fixed Assets/Sales ratio =
`\frac{\textup{fixed assets}}{\textup{Sales at full capacity}}`

or

Fixed Assets/Sales ratio =
`\frac{\textup{150 million}}{\textup{466.67 million}}`

or

Fixed Assets/Sales ratio = 0.3214

or

= 0.3214 × 100% = 32.14%