Maggies Muffins Bakery generated 2000000 in sales during 201

Maggie\'s Muffins Bakery generated $2,000,000 in sales during 2016, and its year-end total assets were $1,400,000. Also, at year-end 2016, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2017, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 7%, and its payout ratio will be 60%. How large a sales increase can the company achieve without having to raise funds externally—that is, what is its self-supporting growth rate? Do not round intermediate calculations. Round your answers to the nearest whole.

Solution

Self supporting growth rate is maximum growth rate that the firm can achieve without raising fund from outside.
It can be calculated as :-

Profit margin (1- payout ratio) × sales

÷

Total assets - spontaneous liabilities - profit margin (1- payout ratio) × sales

7% (1 - 60%) × $2,000,000
                  ÷
$1,400,000 - ( $5,00,000 + $2,00,000) - 7%(1 - 60%) × $2,000,000

= $56,000 ÷ $644,000 = 0.086956 = 8.6956%

Note:- spontaneous liabilities are those which are result of day to day business of firm. (Account payables, accruals, cost of good sold)

Sales can be increased by 8.6956% without raising fund externally or we can say sales can be increased $173,913 ($2,000,000 × 8.6956%) .