Last year Emery Industries had $450 million of sales and $225 million of fixed assets, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?
A) $74.81
B) $78.75
C) $82.69
D) $86.82
E) $91.16

Question

Quizplus · Accepted Answer

The company is operating at 65% capacity, so the full capacity sales would be $450 million / 0.65 = $692.31 million. The FA/Sales ratio at full capacity would be $225 million / $692.31 million = 32.5%. To maintain the same FA/Sales ratio at $450 million sales, the fixed assets should be $450 million * 32.5% = $146.25 million. Therefore, the company could sell $225 million - $146.25 million = $78.75 million of fixed assets.

Last Year Emery Industries Had $450 Million of Sales and $225