Question 4CRS-TP2: Based on the information in Problem 4.1, what is EFN, assumi...
Based on the information in Problem 4.1, what is EFN, assuming 60 percent capacity usage for net fixed assets? Assuming 95 percent capacity?
Full-capacity sales are equal to current sales divided by the capacity utilization. At 60 percent of capacity:
$4,250 = .60 × Full-capacity sales
$7,083 = Full-capacity sales
With a sales level of $4,675, no net new fixed assets will be needed, so our earlier estimate is too high. We estimated an increase in fixed assets of $2,420 – 2,200 = $220. The new EFN will thus be $78.7 – 220 = 2$141.3, a surplus. No external financing is needed in this case.
At 95 percent capacity, full-capacity sales are $4,474. The ratio of fixed assets to full-capacity sales is thus $2,200/4,474 = 49.17%. At a sales level of $4,675, we will thus need $4,675 × .4917 = $2,298.7 in net fixed assets, an increase of $98.7. This is $220 – 98.7 = $121.3 less than we originally predicted, so the EFN is now $78.7 – 121.3 = 2$42.6, a surplus. No additional financing is needed.