SALES INCREASE Paladin Furnish
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SALES INCREASE Paladin Furnishings generated $2 million in sales during 2016,and its year-end total assets were $1.7 million. Also, at year-end2016, current liabilities were $500,000, consisting of $200,000 ofnotes payable, $200,000 of accounts payable, and $100,000 ofaccrued liabilities. Looking ahead to 2017, the company estimatesthat its assets must increase by $0.85 for every $1.00 increase insales. Paladin’s profit margin is 6%, and its retention ratio is35%. How large of a sales increase can the company achieve withouthaving to raise funds externally? Write out your answer completely.For example, 25 million should be entered as 25,000,000. Do notround intermediate calculations. Round your answer to the nearestcent. $ |
Answer:
Equation for AFN:-
AFN = (Total assets of 2016)*(% increase in Sales) -(Spontaneous Liabilities of 2016)*(% increase in Sales) -(Forecasted Sales of 2017)(Net Profit Margin)(Retention Ratio)
Spontaneous Liabilities of 2016 = Accounts Payable + Accruedliabilities
= $ 200,000 + $ 100,000 = $ 300,000
Total assets of previous year = $ 1.7 million
Forecasted sales = Sales of 2016(1+% increase)
= $ 2 million(1+X)
Net Profit Margin = 6%
Retention Ratio = 35%
Let the %increase in Sales be X
As assets must increase by $0.85 for every $1.00 increase insales ,i.e., 85% increase in assets of 100% increase in sales.
So, %increase in assets = 85%of X
= 0.85X
As nothing is specifically mentioned about SpontaneousLiabilities, thus it will increase by same % as of Sales.
The company does not wants to raise funds externally, THUS AFNwill be Zero.
0 = ($ 1.7 million)(0.85X) – ($ 300,000)(X) – [$ 2million(1+X)](6%)(0.35)
0= $ 1445,000X – $ 300,000X – [$ 2,000,000 + $2000,000X)](6%)(0.35)
0 = 1145,000X – 42,000 – 42,000X
42,000 = 1103,000X
X = 3.8078
So, % increase in sales = 3.8078
Forecasted sales = Sales of 2016(1+% increase)
= $ 2 million(1+3.8078%)
= $ 2,076,156
So, the large amount of a sales increase can the companyachieve without having to raise funds externally is $2,076,156
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