Assume that Hercules Manufacturing has sales of $25 million and current assets of $5 million.The corporation utilises the percent-of-sales method of financial forecasting.If Hercules is expected to generate sales of $31 million next year,what will the firm's investment in current assets be?

Question

Quizplus · Accepted Answer

To calculate the investment in current assets using the percent-of-sales method, we need to determine the current ratio:

Current Ratio = Current Assets / Current Liabilities

Assuming current liabilities remain constant, we can use the current ratio to estimate the investment in current assets for next year:

Investment in Current Assets = Current Ratio * Next Year's Sales

Current Ratio = Current Assets / Current Liabilities 
5 = Current Assets / Current Liabilities

Current Liabilities = 5 / Current Ratio = 5/1 = $5 million

Next, we can use the projected sales of $31 million and the current ratio to calculate the investment in current assets:

Investment in Current Assets = Current Ratio * Next Year's Sales
Investment in Current Assets = 5 / 25 * $31 million
Investment in Current Assets = $6.2 million

Therefore, the best choice is C, $6.2 million.

Assume That Hercules Manufacturing Has Sales of $25 Million and Current