A steel manufacturer experienced a decrease in its fixed asset turnover from .9 in Year 5 to .7 in Year 6.This change is consistent with which of the following explanations?
A)The firm sold a fully-depreciated factory on January 1, Year 6 that had been closed in Year 4 and held for sale since then.
B)The steel industry operated at capacity during Year 6, permitting all firms to raise selling prices.
C)The firm recognized an impairment loss on a factory that became obsolete during Year 6 because of new environmental regulations.
D)The firm decreased the number of units produced and sold because of an inability to obtain needed raw materials.
E)none of the above

Question

Quizplus · Accepted Answer

A decrease in fixed asset turnover ratio, which is calculated as sales divided by fixed assets, indicates that the company is generating lower sales per dollar of fixed assets. This could be due to a decrease in sales or an increase in fixed assets without a corresponding increase in sales. Option D, which states that the firm decreased the number of units produced and sold due to an inability to obtain needed raw materials, directly implies a decrease in sales, which would lead to a lower fixed asset turnover ratio. The other options do not directly relate to a decrease in sales or an increase in fixed assets without a corresponding increase in sales.

A Steel Manufacturer Experienced a Decrease in Its Fixed Asset