Question

Hodgkiss Mfg., Inc., is currently operating at only 91 percent of fixed asset capacity. Current sales are $715,000. Fixed assets are $520,000 and sales are projected to grow to $790,000. How much in new fixed assets are required to support this growth in sales?

Answer 1

$2,980

Step-by-step explanation:

To calculate the amount of new fixed assets required to support project sales, we need to first determine the amount of fixed assets required to support $1 of sales

The sales value at full capacity is;

Full capacity sales = 715,000 / 0.91

Full capacity sales = $785,714

To calculate the $ amount of fixed asset requires to support $1 in sales, we need to first calculate the ratio of fixed asset to sales. The ratio is;

Fixed asset to sales = 520,000 / 785,714 = 0.662

Hence, to support a sales of level of $790,000 the total amount of fixed assets required will be;

Total fixed assets required = $790,000 × 0.662 = $522,980

Therefore, new fixed assets required

= $522,980 - $520,000

= $2,980