Last year Emery Industries had $450 million of sales and $225 million of fixed assets,so its FA/Sales ratio was 50%.However,its fixed assets were used at only 65% of capacity.If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity,with sales held constant at $450 million,how much cash (in millions) would it have generated?

Question

Quizplus · Accepted Answer

FA/Sales ratio = Fixed Assets/Sales = 225/450 = 0.5 or 50%
If fixed assets were used at 100% capacity, then the company would need to have 1/0.65 = 1.54 times the fixed assets that it currently has. That means it would need 1.54 x $225 million = $346.5 million in fixed assets.
To get rid of the excess fixed assets, the company would sell $225 million - $346.5 million = $121.5 million worth of fixed assets.
Since the assets are sold at book value, there would be no gain or loss on the sale. So, the company would receive $121.5 million in cash.
Therefore, the answer is $121.5 million, which is closest to option B) $78.75 million.

Last Year Emery Industries Had $450 Million of Sales and $225