Question 1

Weber Interstate Paving Cohad $450 million of sales and $225 million of fixed assets last year, so its FA/Sales ratio was 50% However, its fixed assets were used at only 65% of capacity If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?
A) $74.81
B) $78.75
C) $82.69
D) $86.82
E) $91.16

Accepted Answer

FA/Sales ratio = Fixed assets / Sales = 225 / 450 = 0.5

If fixed assets were used at full capacity, then sales would have been:

Sales = Fixed assets / (FA/Sales ratio) = 225 / 0.5 = $450 million

Since sales are held constant at $450 million, the additional cash generated from selling off excess fixed assets would be:

Additional cash = (Fixed assets at capacity - Current fixed assets) * Book value per fixed asset
= (225 / 0.65 - 225) * (1 - depreciation rate) 
= (323.08 - 225) * (1 - 0.35) 
= $78.75 million

Question 2

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?
A) 54.30%
B) 57.16%
C) 60.17%
D) 63.33%
E) 66.67%

Accepted Answer

North Construction was operating at 60% capacity, so it could increase its operations to 100% capacity without acquiring new fixed assets. The maximum sales growth rate before needing to increase fixed assets can be calculated as the difference between 100% capacity and the current 60% capacity, divided by the current 60% capacity, all multiplied by 100 to convert to a percentage. This gives us $\frac{100\% - 60\%}{60\%} \times 100 = \frac{40\%}{60\%} \times 100 = 66.67\%$.

Question 3

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?
A) 28.5%
B) 30.0%
C) 31.5%
D) 33.1%
E) 34.7%

Accepted Answer

To find the target FA/Sales ratio at full capacity, first calculate the sales at full capacity: $250 million / 0.75 = $333.33 million. The fixed assets remain $100 million. The target FA/Sales ratio is then $100 million / $333.33 million = 30%.

Quiz 9: Forecasting

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?