The AFN equation assumes that ratios remain constant. However, firms are not always operating at full

capacity so adjustments need to be made to the existing asset forecast. Excess capacity adjustments

are changes made to the existing asset forecast because the firm is not operating at full capacity. For

example, a firm may not be at full capacity with respect to its fixed assets. First, the firm's

management must find out the firm's full capacity sales as follows:

Full capacity sales $=\frac{\text{A}\text{c}\text{t}\text{u}\text{a}\text{l}\text{s}\text{a}\text{l}\text{e}\text{s}}{\{\begin{array}{ccc}\text{:}[& \text{P}\text{e}\text{r}\text{c}\text{e}\text{n}\text{t}\text{a}\text{g}\text{e}of\text{c}\text{a}\text{p}\text{a}\text{c}\text{i}\text{t}\text{y}& ]\\ & at\text{w}\text{h}\text{i}\text{c}\text{h}\text{f}\text{i}\text{x}\text{e}\text{d}\text{a}\text{s}\text{s}\text{e}\text{t}\text{s}& \\ & \text{w}\text{e}\text{r}\text{e}\text{o}\text{p}\text{e}\text{r}\text{a}\text{t}\text{e}\text{d}& \end{array}}$

Next, management would calculate the firm's target fixed assets ratio as follows:

$\frac{\text{T}\text{a}\text{r}\text{g}\text{e}\text{t}\text{f}\text{i}\text{x}\text{e}\text{d}\text{a}\text{s}\text{s}\text{e}\text{t}\text{s}}{\text{S}\text{a}\text{l}\text{e}\text{s}}=\frac{\text{A}\text{c}\text{t}\text{u}\text{a}\text{l}\text{f}\text{i}\text{x}\text{e}\text{d}\text{a}\text{s}\text{s}\text{e}\text{t}\text{s}}{\text{F}\text{u}\text{l}\text{l}\text{c}\text{a}\text{p}\text{a}\text{c}\text{i}\text{t}\text{y}\text{s}\text{a}\text{l}\text{e}\text{s}}$

Finally, management would use the target fixed assets ratio with the projected sales to calculate the

firm's required level of fixed assets as follows:

Required level of fixed assets $=($Target fixed assets$/$Sales$)($Projected sales$)$

Quantitative Problem $2$: Mitchell Manufacturing Company has $$1,300,000,000$ in sales and

$$390,000,000$ in fixed assets. Currently, the company's fixed assets are operating at $70\%$ of capacity.

a$.$ What level of sales could Mitchell have obtained if it had been operating at full capacity? Do not

round intermediate calculations. Round your answer to the nearest dollar.

$

b$.$ What is Mitchell's Target fixed assets$/$Sales ratio? Do not round intermediate calculations. Round

your answer to two decimal places.

$\%$

c$.$ If Mitchell's sales increase $60\%,$ how large of an increase in fixed assets will the company need to

meet its Target fixed assets$/$Sales ratio? Do not round intermediate calculations. Round your answer

to the nearest dollar.

$