Question

Last year Emery Industries had $450 million of sales and $225 million of fixed assets, so its Fixed Assets/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. $63.00
b. $74.81
c. $78.75
d. $75.60
e. $66.94

Answer 1

Answer:

Cash Generated = 78.75 millions dollars

so correct option is c. $78.75

Explanation:

given data

sales = $450 million

fixed assets =  $225 million

Fixed Assets/Sales ratio = 50%

capacity utilized =  65%

to find out

how much cash would it have generated

solution

we find here Sales at full capacity that is express as

Sales at full capacity = $\frac{actual\ sale}{capacity\ utilized}$

Sales at full capacity = $\frac{450}{0.65}$

Sales at full capacity = 692.31 millions dollars

so

target fixed assets is = $\frac{fixed\ assets}{Sales\ capacity}$

target fixed assets is = $\frac{225}{692.31}$

target fixed assets is = 32.50 %

and

Optimal fixed assets = sales × target fixed assets

Optimal fixed assets = 450 × 32.50

Optimal fixed assets = $146.25

so Cash Generated is here as  

Cash Generated = Actual fixed assets  - Optimal fixed assets

Cash Generated = $225 - $146.25

Cash Generated = 78.75 millions dollars

so correct option is c. $78.75