Question

Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of fixed assets. 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 FA/Sales ratio should the company set?

Answer 1

FA /Sales = 100 / 333.3 = 30%

Step-by-step explanation:

Assuming Fixed assets yield consistent sales,

When the assets were at 75% the sales were 250, we can form the equation as,

75% Assets = 250m

100% Assets = x sales

We cross multiply to get,

0.75x = 250

Solve for x as the 100% level of sales,

X = Sales @ 100% = 250 / 0.75 = 333.3 m

New FA/Sales ratio then would be.

FA /Sales = 100 / 333.3 = 30%

Hope that helps.