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| 20Y1 | 20Y2 | 20Y3 | |
| Sales | $1,840,000 | $1,920,000 | $1,750,000 |
| Net fixed assets | $570,000 | $620,000 | $750,000 |
| Sales/net fixed assets ratio | 3.23 | 3.1 | 2.33 |
Assuming no revaluation of fixed assets has occurred, which one of the following is the correct conclusion to draw from this trend?
A) the business has excess capacity and is not likely to need financing for new fixed assets.
B) the business has not depreciated its fixed assets according to accounting standards.
C) the business is adding to its fixed assets at about the same rate that its sales are growing.
Expert Answer
As the fixed assets are increasing every year from 570,000 in 20Y1 to 620,000 in 20Y2 to 750,000 in 20Y3
But the sales have increase in 20Y2 but has decreased in 20Y3
So that means capacity to fixed asset is still not utilised in 20Y3 as fixed assets have increase but the sales have decrease so that means business has excess capacity and there is no need of financing for new fixed assets
So correct answer is A.
