Last year Jain Technologies had $250 million of sales and $100 million of fixed assets,so its Fixed Assets/Sales ratio was 40%.However,its fixed assets were used at only 75% of capacity.Now the company is developing its financial forecast for the coming year.As part of that process,the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity.What target Fixed Assets/Sales ratio should the company set?
A)28.5%
B)30.0%
C)31.5%
D)33.1%
E)34.7%

Question

Quizplus · Accepted Answer

If the fixed assets had been used at full capacity, then the sales would have been higher. Let's calculate the sales that would have been generated if the fixed assets were used at full capacity:

Full capacity sales = Actual sales ÷ (Fixed assets utilization rate/100)
Full capacity sales = $250 million ÷ (75/100) = $333.33 million

Now we can calculate the target Fixed Assets/Sales ratio:

Target Fixed Assets/Sales ratio = Fixed assets ÷ Full capacity sales

Target Fixed Assets/Sales ratio = $100 million ÷ $333.33 million = 0.30 or 30%

Therefore, the company should set its target Fixed Assets/Sales ratio at 30% if it wants to operate at full capacity.

Last Year Jain Technologies Had $250 Million of Sales and $100