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Sales Increase Calculation

Bannister Legal Services generated $2.0 million in sales during 2007, and its year end total assets were $1.5 million. Also, at year-end 2007, 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 2008, the company estimates that its assets must increase by 75 cents for every $1 increase in sales. Bannister's profit margin is 5%, and its payout ratio is 60%. How large a sales increase can the company achieve without having to raise funds externally?

Solution Summary

This solution illustrates how to determine the maximum amount by which a company can grow its sales before it needs to seek additional external funding.