Q:

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

Accepted Solution

A:
Answer:Option B. $101.25 millionStep-by-step explanation:Given data of last year of Weber Interstate Paving co.Sales = $450 millionFixed assets = $225 millionPercentage 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]                    = $818.18Target FA/Sales ratio = 50% of 55                                    = 27.50%Optimum FA = Sales × Sales ratio                     = 450 × 27.5%                     = $123.75Cash generated = Actual fixed assets - Optimum FA                             = 225 - 123.75                            = $101.25 millionOption B. $101.25 million is the correct answer.