SALES INCREASE Paladin Furnish

Equation for AFN:-

AFN = (Total assets of 2016)*(% increase in Sales) -(Spontaneous Liabilities of 2016)*(% increase in Sales) -(Forecasted Sales of 2017)(Net Profit Margin)(Retention Ratio)

Spontaneous Liabilities of 2016 = Accounts Payable + Accruedliabilities

= $ 200,000 + $ 100,000 = $ 300,000

Total assets of previous year = $ 1.7 million

Forecasted sales = Sales of 2016(1+% increase)

= $ 2 million(1+X)

Net Profit Margin = 6%

Retention Ratio = 35%

Let the %increase in Sales be X

As assets must increase by $0.85 for every $1.00 increase insales ,i.e., 85% increase in assets of 100% increase in sales.

So, %increase in assets = 85%of X

= 0.85X

As nothing is specifically mentioned about SpontaneousLiabilities, thus it will increase by same % as of Sales.

The company does not wants to raise funds externally, THUS AFNwill be Zero.

0 = ($ 1.7 million)(0.85X) – ($ 300,000)(X) – [$ 2million(1+X)](6%)(0.35)

0= $ 1445,000X – $ 300,000X – [$ 2,000,000 + $2000,000X)](6%)(0.35)

0 = 1145,000X – 42,000 – 42,000X

42,000 = 1103,000X

X = 3.8078

So, % increase in sales = 3.8078

Forecasted sales = Sales of 2016(1+% increase)

= $ 2 million(1+3.8078%)

= $ 2,076,156

So, the large amount of a sales increase can the companyachieve without having to raise funds externally is $2,076,156

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