3. Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However, non-current assets must be increased in specific amounts because it is impossible, as a practical matter, to buy part of a new plant or machine. In this case, a company has a ‘staircase’ or ‘lumpy’ fixed cost structure. Assume Pinjarra Air is currently producing at 100 per cent capacity. As a result, to increase production, the company must set up an entirely new line at a cost of $5 000 000. Calculate the new EFN with this assumption.

What does this imply about capacity utilisation for the company next year?

After Chris completed the ratio analysis for Pinjarra Air (see Chapter 3), Mark and Todd approached him about planning for next year’s sales. The company had historically used little planning for investment needs. As a result, the company experienced some challenging times because of cash flow problems. The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Chris to prepare a financial plan for the next year so the company can begin to address any outside investment requirements. The statement of profit or loss and statement of financial position are shown here:

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Pinjarra Air Limited 2020 Statement of profit or loss Revenue Cost of sales $46298115 34536913 Other expenses 5870865 Depreciation EBIT 2074853 $ 3815484