James Mfg. is currently operating at only 86 percent of fixed asset capacity. Fixed assets are $387,000. Current sales are $510,000 and are projected to grow to $664,000. What amount must be spent on new fixed assets to support this growth in sales?

Question

Quizplus · Accepted Answer

To calculate the amount required for new fixed assets, we need to first calculate the current fixed asset capacity:

Current Fixed Asset Capacity = Fixed Assets / Operating Capacity
Operating Capacity = 86%
Fixed Assets = $387,000

Current Fixed Asset Capacity = $387,000 / 0.86 = $450,000

Next, we need to calculate the amount of fixed assets required to support the projected sales:

Required Fixed Assets = Projected Sales / Fixed Asset Turnover Ratio
Fixed Asset Turnover Ratio = Current Sales / Current Fixed Asset Capacity

Fixed Asset Turnover Ratio = $510,000 / $450,000 = 1.13

Required Fixed Assets = $664,000 / 1.13 = $587,611

The amount of new fixed assets required is the difference between the required fixed assets and the current fixed assets:

Amount of New Fixed Assets = Required Fixed Assets - Current Fixed Assets

Amount of New Fixed Assets = $587,611 - $387,000 = $200,611

Therefore, the correct answer is (C) $46,319.

James Mfg Is Currently Operating at Only 86 Percent of Fixed