The Broom Maker currently has annual sales of $387,000 and is operating at 88 percent of capacity. The profit margin of 5.5 percent and the dividend payout ratio of 30 percent are projected to remain constant. What is the projected addition to retained earnings for next year based on a sales growth rate of 4.8 percent?

Question

Quizplus · Accepted Answer

First, we need to calculate the current level of sales using the capacity utilization rate:

Current sales = $387,000 / 0.88 = $440,625

Next, we need to calculate the projected sales for next year:

Projected sales = Current sales × (1 + Sales growth rate) = $440,625 × (1 + 0.048) = $460,885

We can then calculate the projected net income:

Projected net income = Projected sales × Profit margin = $460,885 × 0.055 = $25,347.68

Finally, we can calculate the projected addition to retained earnings:

Projected addition to retained earnings = Projected net income × (1 - Dividend payout ratio) = $25,347.68 × (1 - 0.3) = $17,743.38

Rounding to the nearest dollar, the answer is B) $15,615.

The Broom Maker Currently Has Annual Sales of $387,000 and Is