Most assets can be increased as a percentage 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 staircase or lumpy fixed cost structure. Assume S&S Air is currently producing at 100 percent 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 utilization for the company next year?
S&S AIR, INC. 2018 Income Statement Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (25%) Net income Dividends Add to retained earnings $46,298,115 34,536,913 5,870,865 2,074,853 $ 3,815,484 725,098 $ 3,090,386 772,597 $ 2,317,789 $ 705,000 1,612,789 S&S AIR, INC. 2018 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Cash Accounts receivable 524,963 843,094 1,235,161 $ 2,603,218 Accounts payable Notes payable Total current liabilities $ 1,068,356 2,439,553 $ 3,507,909 Inventory Total current assets Long-term debt $ 6,300,000 Fixed assets Net plant and equipment $20,381,945 $ 460,000 Shareholder equity Common stock Retained earnings Total equity Total liabilities and equity 12,717,254 $13,177,254 $22,985,163 Total assets $22,985,163 Light Airplane Industry Ratios Lower Quartile Upper Quartile Median .50 1.43 1.89 Current ratio Quick ratio .62 .39 1.38 .35 .21 .85 6.15 9.82 .52 10.89 14.11 .21 .08 .68 4.89 6.27 .41 .68 1.68 5.18 5.84 Cash ratio Total asset turnover Inventory turnover Receivables turnover Total debt ratio Debt-equity ratio Equity multiplier Times interest earned Cash coverage ratio Profit margin Return on assets Return on equity 1.08 2.08 8.06 .61 1.56 2.56 9.83 10.27 9.41 4.05% 7.15% 6.05% 5.10% 9.53% 15.14% 13.21% 9.93% 19.15% S&S AIR, INC. 2018 Income Statement Sales Cost of goods sold Other expenses Depreciation EBIT Interest Taxable income Taxes (25%) Net income Dividends Add to retained earnings $46,298,115 34,536,913 5,870,865 2,074,853 $ 3,815,484 725,098 $ 3,090,386 772,597 $ 2,317,789 $ 705,000 1,612,789 S&S AIR, INC. 2018 Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Cash Accounts receivable 524,963 843,094 1,235,161 $ 2,603,218 Accounts payable Notes payable Total current liabilities $ 1,068,356 2,439,553 $ 3,507,909 Inventory Total current assets Long-term debt $ 6,300,000 Fixed assets Net plant and equipment $20,381,945 $ 460,000 Shareholder equity Common stock Retained earnings Total equity Total liabilities and equity 12,717,254 $13,177,254 $22,985,163 Total assets $22,985,163 Light Airplane Industry Ratios Lower Quartile Upper Quartile Median .50 1.43 1.89 Current ratio Quick ratio .62 .39 1.38 .35 .21 .85 6.15 9.82 .52 10.89 14.11 .21 .08 .68 4.89 6.27 .41 .68 1.68 5.18 5.84 Cash ratio Total asset turnover Inventory turnover Receivables turnover Total debt ratio Debt-equity ratio Equity multiplier Times interest earned Cash coverage ratio Profit margin Return on assets Return on equity 1.08 2.08 8.06 .61 1.56 2.56 9.83 10.27 9.41 4.05% 7.15% 6.05% 5.10% 9.53% 15.14% 13.21% 9.93% 19.15%
