Question

Use the below information to answer the following question.

Income Statement
For the Year
Sales $42,700
Cost of goods sold 29,250
Depreciation 3,750

Earnings before interest and taxes $ 9,700
Interest paid 1,360

Taxable income $ 8,340
Taxes 2,840

Net income $ 5,500

Dividends $1,925


Balance Sheet
End-of-Year
Cash $1,320
Accounts receivable 3,780
Inventory 10,200

Total current assets $15,300
Net fixed assets 33,600

Total assets $ 48,900

Accounts payable $ 3,650
Long-term debt 18,100
Common stock ($1 par value) 15,000
Retained earnings 12,150

Total Liab. & Equity $48,900


Assume this firm is operating at 88 percent of capacity. All costs and net working capital vary directly with sales. What is the amount of the pro forma net fixed assets for next year if sales are projected to increase by 13 percent?

Answer 1

The calculation of pro forma net fixed assets in this scenario requires the current net fixed assets value and knowledge of any planned investments, which are not provided. Typically, net fixed assets do not vary directly with sales and would remain constant unless new investments are made.

Step-by-step explanation:

To calculate the pro forma net fixed assets for next year when sales are projected to increase by 13 percent and the firm is currently operating at 88 percent of capacity, we would use the following approach:

We need to first determine the current full capacity sales. If 88 percent capacity results in the current sales, then the full capacity sales can be found by dividing the current sales by the capacity utilization ratio (0.88). After finding the full capacity sales, we project the new sales level by increasing it by 13 percent.

Since net fixed assets are typically not directly related to changes in sales or capacity utilization, they do not vary directly with sales and we assume they remain constant, unless the company plans to invest in new fixed assets to support the increased capacity. The prompt does not provide information on the current net fixed assets, nor does it indicate any planned investments. Therefore, we cannot compute the pro forma net fixed assets precisely.