Question

Last year Emery Industries had $450 million of sales and $225 million of fixed assets, 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

Answer 1

Answer:

Cash generated is 78.75 Million

Explanation:

Sales= $450  Million

Fixed Assets= $225  Million

% of capacity utilized. . 65%

Sales at full capacity = actual sales/%of capacity used = 692.31 millions dollars .

Target FA = Full capacity FA/sales = FA/Capacity sales = 32.50%

(225*65% = 146.25, 146.25/450 = 32.50%)

Optimal FA = sales * targeted FA/Sales Ratio = 450*32.50% = 146.25

Cash Generated = Actual FA-optimal FA = 225-146.25 = 78.75 millions dollars

Answer 2

Answer: $78.75

Explanation:

Sales $450 Fixed assets $225 % of capacity utilized 65% Sales at full capacity = Actual sales/% of capacity used = $692 Target FA/Sales ratio = Full capacity FA/Sales = FA/capacity sales = 32.50% Optimal FA = Sales ´ target FA/Sales ratio = $146.25 Cash generated = Actual FA – Optimal FA = $78.75