XYZ Company has assets that are traditionally 85% of sales, and its liabilities traditionally are 50% of sales. Sales for this year are $50,000 and sales for next year are projected to be $150,000 with a profit margin of 10%. No owner payout will be taken. Using the percentage of sales method, XYZ will need
A) $15,000
B) $70,000
C) $52,500
D) $20,000 of additional financing.
E) No financing is required.

Question

Quizplus · Accepted Answer

XYZ Company will need additional financing because the increase in assets required to support the higher sales exceeds the increase in liabilities and retained earnings. The increase in assets is $85,000 (85% of $150,000 - 85% of $50,000), while the increase in liabilities is $50,000 (50% of $150,000 - 50% of $50,000). The profit is $15,000 (10% of $150,000), which will be retained. Therefore, the additional financing needed is $85,000 - $50,000 - $15,000 = $20,000.

XYZ Company Has Assets That Are Traditionally 85% of Sales