Assume that Gatsby Enterprises has sales of $83 million and fixed assets of $22.4 million in 2013. The corporation utilizes the percent-of-sales method of financial forecasting. If Gatsby is expected to generate sales of $94 million in 2014, what will the firm's investment in fixed assets be? The minimum fixed asset expansion costs $4,000,000.
A) $19.8 million
B) $26.4 million
C) $16.2 million
D) $25.4 million

Question

Quizplus · Accepted Answer

The firm's investment in fixed assets can be forecasted using the percent-of-sales method. The ratio of fixed assets to sales in 2013 is $22.4 million / $83 million. To find the projected fixed assets for 2014, multiply this ratio by the projected sales of $94 million, resulting in $25.4 million. However, considering the minimum fixed asset expansion cost of $4 million, the correct answer is $26.4 million, as the expansion cost needs to be added to the existing fixed assets to meet the minimum requirement.

Assume That Gatsby Enterprises Has Sales of $83 Million and Fixed