Question

Last year Wei Guan Inc. had $795 million of sales, and it had $265 million of fixed assets that were used at 65% of capacity. In millions, by how much could Wei Guan's sales increase before it is required to increase its fixed assets? Do not round intermediate calculations.

Answer 1

The sales revenue can increase by $428.08 million without an increase in fixed assets.

What does 65% capacity mean?

65% capacity means that the company is currently using only achieving 65% of sales it could have achieved with its current fixed assets, in other words, the existing assets can still accommodate more production which would increase sales to 100% capacity before additional investment in fixed assets is required.

This means that increase in sales revenue that could be achieved using existing assets is sales revenue at 100% capacity minus the level of sales which is only 65% of the optimum level.

65% capacity sales revenue=100% capacity sales revenue*65%

65% capacity sales revenue= $795 million

100% capacity sales revenue=unknown(assume it is X)

$795 million=X*65%

X=$795 million/65%

X=100% capacity sales revenue=$1223.08 million

increase in sales=$1223.08 million-$795 million

increase in sales=$428.08 million

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