Ausel's Cabinets has $27,600 in net fixed assets and is operating at 96 percent of capacity. Sales are $36,200 currently. What is the required increase in fixed assets if sales are projected to increase by 14 percent?

Question

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To find the required increase in fixed assets, first determine the full capacity sales level, then calculate the new sales level after the projected increase, and finally determine the new required fixed assets and the increase needed. Full capacity sales are $36,200 / 0.96 = $37,708.33. A 14% increase in sales from the current $36,200 results in new sales of $36,200 * 1.14 = $41,268. The ratio of fixed assets to sales at full capacity is $27,600 / $37,708.33. To support $41,268 in sales, the fixed assets needed are $41,268 * ($27,600 / $37,708.33) = $30,205. The increase required in fixed assets is $30,205 - $27,600 = $2,605.

Ausel's Cabinets Has $27,600 in Net Fixed Assets and Is