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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 55% 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?

Select the correct answer.

A. $103.15 B. $101.25 C. $106.95 D. $105.05 E. $97.45

Respuesta :

Answer:

Option B. $101.25 million

Step-by-step explanation:

Given data of last year of Weber Interstate Paving co.

Sales = $450 million

Fixed assets = $225 million

Percentage of capacity used = 55%

Full capacity = [tex]\frac{\text{Actul sales}}{\text{percentage of used capacity}}[/tex]

                     = [tex]\frac{450}{\frac{55}{100} }[/tex]

                    = [tex]\frac{450}{0.55}[/tex]

                   = $818.18

Target FA/Sales ratio = 50% of 55

                                   = 27.50%

Optimum FA = Sales × Sales ratio

                    = 450 × 27.5%

                    = $123.75

Cash generated = Actual fixed assets - Optimum FA

                            = 225 - 123.75

                           = $101.25 million

Option B. $101.25 million is the correct answer.

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