Last year Canada MasterCorp.had $10 million of sales and $7.5 million of fixed assets,so its FA/Sales ratio was 75%.However,its fixed assets were used at only 50% of capacity.Now the company is developing its financial forecast for the coming year.As part of that process,the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity.What target FA/Sales ratio should the company set?

Question

Quizplus · Accepted Answer

If the fixed assets were used at only 50% of capacity last year, it means that there is room for growth in sales without the need for additional fixed assets up to 100% capacity. Therefore, to determine the target FA/Sales ratio at full capacity, we need to adjust last year's ratio by the capacity utilization rate (50%). 
Adjusted FA/Sales ratio = 75%/50% = 150/100 = 1.5 or 150%. 
However, 150% is not a valid ratio choice, so we need to choose the closest option, which is B) 60.0%.

Last Year Canada MasterCorp