Assume a firm is currently operating at 98 percent of capacity with sales of $28,400. Next year, sales are projected to increase to $35,000. What is the projected addition to fixed assets if the firm currently has fixed assets of $16,900 and total assets of $24,600?
A) $0
B) $3,511
C) $2,629
D) $580
E) $1,688

Question

Quizplus · Accepted Answer

First, we need to calculate the current fixed asset utilization rate:

Fixed Asset Utilization Rate = Current Sales / Current Fixed Assets = $28,400 / $16,900 = 1.68

Since the company is operating at 98% capacity, we can assume that the fixed assets are at full utilization. Therefore, to accommodate the projected increase in sales, the company will need to increase fixed assets in proportion to the increase in sales.

Projected Fixed Assets = Current Fixed Assets × (Projected Sales / Current Sales) = $16,900 × ($35,000 / $28,400) = $20,411

Finally, we can calculate the addition to fixed assets by subtracting the current fixed asset value:

Addition to Fixed Assets = Projected Fixed Assets - Current Fixed Assets = $20,411 - $16,900 = $3,511

Therefore, the best choice is B, a projected addition to fixed assets of $3,511.

Assume a Firm Is Currently Operating at 98 Percent of Capacity