Warsaw Incorporated is currently operating at 80% of capacity.The sales of Warsaw were $25 million this year and their net plant and equipment were valued at $100 million.Sales are expected to increase to $35 million next year.How much additional plant and equipment will Warsaw need to acquire to keep production up with the new level of sales?
A) $20 million
B) $15 million
C) $12 million
D) $10 million
E) No additional plant and equipment is needed.

Question

Quizplus · Accepted Answer

Since Warsaw is currently operating at 80% of capacity, there is room for an increase in production to meet the expected sales of $35 million next year. The additional production needed to meet the sales increase can be calculated as follows:

Additional production needed = (sales increase / current capacity utilization) - current production
= ($35 million - $25 million) / 0.8 - $25 million
= $12.5 million

This means that Warsaw will need to acquire an additional $12.5 million worth of plant and equipment to meet the increased production needs. Therefore, choice C) of $12 million is the closest answer, and the best choice among the given options.

Warsaw Incorporated Is Currently Operating at 80% of Capacity