Hodgkiss Mfg., Incorporated, is currently operating at only 84 percent of fixed asset capacity. Fixed assets are $379,200. Current sales are $480,000 and projected to grow to $680,000. How much in new fixed assets are required to support this growth in sales? Assume the company wants to operate at full capacity.Single choice
A
$68,446
B
$75,650
C
$72,048
D
$74,930
E
$158,000

Question

Hodgkiss Mfg., Incorporated, is currently operating at only 84 percent of fixed asset capacity. Fixed assets are $379,200. Current sales are $480,000 and projected to grow to $680,000. How much in new fixed assets are required to support this growth in sales? Assume the company wants to operate at full capacity.Single choice

A

$68,446

B

$75,650

C

$72,048

D

$74,930

E

$158,000

BlackTom AI · Accepted Answer

Operating at 84% capacity means current sales represent 84% of the sales possible with the existing fixed assets. Therefore full-capacity sales supported by current fixed assets = current sales ÷ 0.84.

Step-by-step:
1. Full-capacity sales supported now = 480,000 ÷ 0.84 = 571,428.571 (rounded).
2. The company projects sales of 680,000, which exceeds current full-capacity sales by:
   Excess sales = 680,000 − 571,428.571 = 108,571.429.
3. Determine fixed-assets required per dollar of full-capacity sales:
   Fixed assets per full-capacity sales dollar = 379,200 ÷ 571,428.571 = 0.66384 (approximately).
4. New fixed assets required to support the excess sales = Excess sales × fixed-assets-per-dollar
   = 108,571.429 × 0.66384 ≈ 72,048.
Alternatively, note that projected sales are 1.19 times the current full-capacity sales (680,000 ÷ 571,428.571 = 1.19). Required total fixed assets = 1.19 × 379,200 = 451,248. The increase needed = 451,248 − 379,200 = 72,048.

Why this is correct:
- Fixed assets must scale with sales when moving to full utilization; we first find the full-capacity sales that current assets can support, then scale fixed assets proportionally to the projected sales. The arithmetic above yields an additional required fixed-asset investment of $72,048.

Why the other choices are incorrect:
- $68,446 and $74,930 are close but do not match the exact proportional calculation shown.
- $75,650 is higher than the precise proportional need.
- $158,000 is far larger than required (more than double the correct increase).

Final confirmation: The calculated additional fixed assets required is $72,048, matching the provided correct answer.

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