A Firm Must Maintain a Minimum Current Ratio of 2

question 16

Multiple Choice

A firm must maintain a minimum current ratio of 2 to 1 in order to be in compliance with one of its bond covenants. Sales are forecast to be $10,000 next year. Historically, current assets
Have averaged 75% of sales. Accounts payable have averaged 20% of sales. Assuming these
Historical ratios will continue, determine the maximum amount of additional short-term debt
Available to the firm next year.

• A)$3,750
• B)$5,500
• C)$13,000
• D)$1,750

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Definitions:

Variable Manufacturing Overhead

The portion of overhead costs that varies with production volume, including utilities and indirect labor expenses related to manufacturing.

Fixed Manufacturing Overhead

Costs in manufacturing that do not vary with the level of production output, such as salaries of managers and depreciation of factory equipment.

Machine-Hours

A metric for the amount of time a machine is operational, typically used in manufacturing processes.

Fixed Costs

Costs that do not vary with the level of production or sales over a short period, such as rent, salaries, and insurance.