Case study
Review “Mini Case: Planning for Growth at S&S Air” in your textbook on page 129, also found at the end of Chapter 4 in your textbook. Then, answer the following questions:
Calculate the internal growth rate and sustainable growth rate for S&S Air. What do these numbers mean? How do you know?
S&S Air is planning for a growth rate of 12% next year. Calculate the EFN for the company assuming the company is operating at full capacity. Can the company’s sales increase at this growth rate? Explain your reasoning.
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 part of a new plant or machine. In this case, a company has a “staircase” or “lumpy” fixed cost structure. Assume S&S Air is currently producing at 100% capacity. As a result, to increase production, the company must set up an entirely new line at a cost of $5,000,000. Calculate the new EFN with this assumption. What does this imply about capacity utilization for the company next year?
Consider how long term planning and growth is affected by location in the world. Discuss how you would advise S&S Air about planning and growth in your own country and expansion into other countries?
