Question

Weber Interstate Paving Co. had $450 million of sales and $225 million of fixed assets last year, 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?

Answer 1

Answer:

Sales = $450 million

Fixed assets = $225 million

Fixed assets/Sales ratio = 50%

At 100% Capacity

Fixed assets = 100/65 x $225 million = $346.15 million

The amount of cash generated from the sale of fixed assets at book value is $346.15 million.

Explanation:

The amount of cash generated from the the sale of fixed assets at book value equals 100/65 of the original book value. The original book value was calculated based on 65% capacity. Since the company is now operating at full capacity (100%), the book value becomes 100/65 of the original book value.

Answer 2

Answer:

78.75

Explanation:

1)Sales at Full Capacity=Actual sales /% capacity used =450/65%=692.31

2)Target FA/Sales  ratio =FA/Capacity sales = 225/692.31=32.5%

3)Optimal FA =Sales(after  possible selling FA ) / Target FA/Sales  ratio=

450 /32.5%=146.25

4)Cash generated =Actual  FA – Optimal FA= 225 -146.25=78.75