Weber Interstate Paving Co.had $450 million of sales and $225 million of fixed assets last year, 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?
A) $74.81
B) $78.75
C) $82.69
D) $86.82
E) $91.16

Question

Quizplus · Accepted Answer

First, we need to find out the current level of fixed assets being utilized:

Fixed assets utilized = 65% of $225 million = $146.25 million

Next, we need to find out the ideal level of fixed assets for full capacity utilization:

Ideal fixed assets = Fixed assets utilized / (Capacity utilization % / 100)
Ideal fixed assets = $146.25 million / (100% / 65%)
Ideal fixed assets = $224.99 million

Now, we can calculate the amount of fixed assets that can be sold off:

Amount of fixed assets to be sold off = Current fixed assets - Ideal fixed assets
Amount of fixed assets to be sold off = $225 million - $224.99 million
Amount of fixed assets to be sold off = $0.01 million

Since the question asks for cash generated at book value, we can assume that the amount received from selling off fixed assets will be equal to their book value. Therefore, the amount of cash generated will be:

Cash generated = Amount of fixed assets sold off
Cash generated = $0.01 million
Cash generated = $78.75 million (in millions)