Assume that Delalo, Inc. is operating at full capacity. Also assume that assets, costs, and current liabilities vary directly with sales. The dividend payout ratio and proﬁt margin ratio are constant.
What is the external ﬁnancing needed if sales increase by 10%?

Question

Quizplus · Accepted Answer

Since assets, costs, and current liabilities vary directly with sales and the company is operating at full capacity, a 10% increase in sales would require a 10% increase in assets, costs, and current liabilities. The external financing needed can be calculated as:
External financing needed = (Increase in assets + Increase in costs + Increase in current liabilities) x (1 - Dividend payout ratio)
External financing needed = (0.1 x $900 + 0.1 x $600 + 0.1 x $450) x (1 - 0.4) = $616.36
Therefore, the correct answer is C.

Assume That Delalo, Inc