Question 4.1: Suppose Rosengarten were operating at 90 percent capacity. W...
Suppose Rosengarten were operating at 90 percent capacity. What would sales be at full capacity? What is the capital intensity ratio at full capacity? What is EFN in this case?
Full-capacity sales would be $1,000/.90 = $1,111. From Table 4.3, we know that fixed assets are $1,800. At full capacity, the ratio of fixed assets to sales is thus:
Fixed assets/Full-capacity sales = $1,800/1,111 = 1.62
This tells us that Rosengarten needs $1.62 in fixed assets for every $1 in sales once it reaches full capacity. At the projected sales level of $1,250, then, it needs $1,250 × 1.62 = $2,025 in fixed assets. Compared to the $2,250 we originally projected, this is $225 less, so EFN is $565 – 225 = $340.
Current assets would still be $1,500, so total assets would be $1,500 + 2,025 = $3,525.
The capital intensity ratio would thus be $3,525/1,250 = 2.82, less than our original value of 3 because of the excess capacity.
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ROSENGARTEN CORPORATION Balance Sheet |
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| $ | Percentage of Sales | $ | Percentage of Sales | |||||
| Assests | Liabilities and Owners’ Equity | |||||||
| Current assets | Current liabilities | |||||||
| Cash | $ 160 | 16 \% | Accounts payable | $ 300 | 30% | |||
| Accounts receivable | 440 | 44 | Notes payable | \underline{100} | \underline{n/a} | |||
| Inventory | \underline{600} | \underline{60} | Total | $ \underline{400} | \underline{n/a} | |||
| Total | $ \underline{1,200} | \underline{120} | Long-term debt | $ \underline{800} | \underline{n/a} | |||
| Fixed assets | Owners’ equity | |||||||
| Net plant and equipment | $ \underline{1,800} | \underline{180} | Common stock and paid-in surplus | $ 800 | n/a | |||
| Retained earnings | \underline{1,000} | \underline{n/a} | ||||||
| Total | $ \underline{1,800} | \underline{n/a} | ||||||
| Total assets | $\underline{\underline{3,000}} | \underline{300} \% | Total liabilities and owners’ equity | $\underline{\underline{3,000}} | \underline{n/a} | |||