Question
Most assets can be increased as a % of sales. For instance, cash can be increased by any amount; however, fixed assets must be increased
Most assets can be increased as a % of sales. For instance, cash can be increased by any amount; however, fixed 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 lumpy fixed cost structure. Assume East Coast Yachts is currently producing at 100% capacity - as a result, to increase production, the company must set up an entirely new line at a cost of $25,000,000. Calculate the new EFN with this assumption (presuming the 20% growth rate next year). What does this imply about capacity utilization for the company next year?
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