18.3

a. The company currently runs at 75% of capacity given the current level of fixed assets. Sales can increase until the company is at 100% of capacity; therefore, sales can increase to $60 million X (100/75) = $80 million.

b. If sales were to increase by 50% to $90 million, new fixed assets would need to be added. The ratio of assets to sales when the company is operating at 100% of capacity [from part (a)] is $50 million/$80 million %. Therefore, to support sales of $90 million, the company needs at least $90 million X % = $56.25 million of fixed assets. This calls for a $6.25 million investment in additional fixed assets. =