Reference no: EM13842986

"S&s air After Chris completed the ratio analysis for S&S Air, Mark and Todd approached him about planning for next year's sales. The company had historically used little planning for investment needs. As a result, the company experienced some challenging times because of cash flow problems.

The lack of planning resulted in missed sales, as well as periods when Mark and Todd were unable to draw salaries. To this end, they would like Chris to prepare a financial plan for the next year so the company can begin to address any outside investment requirements.

The income statement and balance sheet are shown here: 2008 income statement Sales 30,499,420 COGS 22,224,580 Other expenses 3,867,500 Depreciation 1,366,680 EBIT 3,040,660 Interest478,240 Taxable Income2,562,420 Taxes (40%)1,024,968 Net Income1,537,452 Dividends560,000 Add to retained earnings977,452 Assets Cash441,000 A/R708,400 Inventory 1,037,120 Total Current Assets2,186,520 Fixed Net plant and equipment16,122,400 Total Assets18,308,920 Current Liabilities A/P889,000 Notes Payable2,030,000 Total Current liabilities2,919,000 Long Term Debt5,320,000 Shareholder equity Common stock 350,000 Retained earnings9,719,920 Total Equity10,069,920 Total liabilities and equity18,308,920

QUESTION: 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 par of a new plant or machine. In this case, a company has a "staircase or lumpy fixed costs structure.

Assume S&S air is currently producing at 100 percent capacity. As a result, to increase production, the company must setup an entirely new line at a cost of 5,000,000. Calculate hte new EFN with this assumption. What does this imply about capacity utilization for hte company next year?