Assume that Gatsby Enterprises has sales of $83 million and fixed assets of $22.4 million in 2013.The corporation utilises the percent-of-sales method of financial forecasting.If Gatsby is expected to generate sales of $94 million in 2014,what will the firm's investment in fixed assets be? The minimum fixed asset expansion costs $4,000,000.
A)$19.8 million
B)$26.4 million
C)$16.2 million
D)$25.4 million

Question

Quizplus · Accepted Answer

First, we need to use the percent-of-sales method to calculate the projected investment in fixed assets:
Projected investment in fixed assets = (Sales in 2014 - Sales in 2013) x Fixed assets / Sales in 2013
Projected investment in fixed assets = ($94 million - $83 million) x $22.4 million / $83 million
Projected investment in fixed assets = $2.80 million
However, the question specifies that the minimum fixed asset expansion costs $4,000,000, so the actual investment in fixed assets will be higher. 
Investment in fixed assets = Max($2.80 million, $4.00 million) = $4.00 million (we take the maximum of the two values) + $22.4 million (original fixed assets) = $26.4 million.
Therefore, the answer is B) $26.4 million.

Assume That Gatsby Enterprises Has Sales of $83 Million and Fixed