Assume that Gerber and Sons has sales of $83 million and fixed assets of $22.4 million in 2018.The corporation utilizes the percentage-of-sales method of financial forecasting.If Gerber is expected to generate sales of $94 million in 2019, 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

Using the percentage-of-sales method, we calculate the investment in fixed assets by multiplying the sales forecast by the firm's historical fixed assets-to-sales ratio. 
Fixed asset-to-sales ratio = Fixed assets/Sales = $22.4 million/$83 million = 0.2692
Investment in fixed assets in 2019 = 0.2692 x $94 million = $25.34 million. 
However, since the minimum fixed asset expansion cost is $4 million, the investment in fixed assets in 2019 would be $25.34 million + $4 million = $29.34 million. 
Therefore, the best choice is B, which is closest to $29.34 million.

Assume That Gerber and Sons Has Sales of $83 Million