Missing Data in Problem?

[c_hayhurst]

I am doing the Problems for Reading 50's Appendix, and question 3 provides the following data:

Sale price= $12/unit
Total Assets= $2250000
Debt Ratio= 40%
Cost of debt= 10%

VC for method A= $6.75/unit
FC for method A= $675000

VC for method B= $8.25/unit
FC for method B= $401250

The question asks to calculate DTL for each method. This requires knowing the quantity sold. However, that data is not given. In the answer key, it is given that Sales=200000.

How the hell do you get that figure?

Based on assets of $2250000, if you subtract out fixed costs and solve for units sold (Assets-Fixed Cost)/Variable Cost, you get a production capacity of 233333.33 units under method A and 224090.91 units under method B.

I am at a total loss as to how I am supposed to know sales=200000.

I'm hoping the units sold is mistakenly missing from the problem. If there is a way to figure out the quantity sold to equal 200000, I'd love to hear it. The answer key gives no insight.

 

[satyaa]

This is the only way I could think of:

Debt ratio = 0.4 = (Total long term debt + Total Current liab)/(Total capital)

Total capital = Total long term debt + Total Current liab + Total Equity

So, Total debt = 2,250,000 * 0.4 = 900,000

The firm needs to sell enough qty to take care of the remaining liability = (2,250,000 - 900,000) = 1,350,000

With a VC = 6.75, it translates into 200,000 units

The logic above could be flawed. It is a real good question. I will think about it and see if it could be solved in a different way.

Thanks

 

[jamespucyk]

Same here, I am a stumped on this one too, but I do see Satyaa's logic on that one, it does make sense logically and mathematically. I would think that typically a company would have an estimate of demand at least based upon a scenario analysis, so Q would be given. But the 1.35 million is shareholder's equity. Even using BE quantity FC/P-VC yields two different #s.

 

[c_hayhurst]

OMG. That seems like a stretch to assume a CFA candidate should be able to make an assumption about forecasted demand. But, your math supports the curriculum's assumption about the assumption. heh.

wow. Can you say, "Feeling of impending doom"?

Oh well, back to more studying.