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Increase in Sales without External Funds

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Pierce Furnishings generated $2.0 million in sales during 2004, and its year-end total assets were $1.5 million. Also, at year-end 2004, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accruals. Looking ahead to 2005, the company estimates that its assets must increase by 75 cents for every $1 increase in sales. Pierce's profit margin is 5 %, and its payout ratio is 60 percent. How large a sales increase can the company achieve without having to raise funds externally?

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Solution Summary

The solution calculates the sales increase that the company can achieve without having to raise funds externally.

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Sales in 2004= $2,000,000

Increase in assets = 75 % of increase in sales
Let the new sales for which no external funds is required= x

Therefore profit = 5 % of x ...

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