Question

Paladin Furnishings generated $2 million in sales during 2016, and its year-end total assets were $1.6 million. Also, at year-end 2016, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets must increase by $0.80 for every $1.00 increase in sales. Paladin's profit margin is 5%, and its retention ratio is 35%.

How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermedia

Answer 1

break even point retained earnings 43,750

Step-by-step explanation:

retained eargins increase by 35%

1 dollar of sale --> 0.80 dollar of assets

1 dollar of sale --> 0.05 dollar of income

1 dollar of income --> 0.35 dollar of retained earnings

(1 x 0.05 x 0.35 ) / 0.8 = 0,021875‬

2,000,000 x 0.05 x 0.35 / 0.8 = 43,750

Thefirst part determianted how much of the net income ( sales x profit margin) becomes retained earnins.

Then we divide this by the ratio of assets needed per dollar of sales as liabilities do not expect to change to increase sales.