The relationship between sales and the various types of assets is important in financial forecasting. The forecasted financial statements approach, under the assumption that each asset item grows at the same rate as sales, leads to an AFN forecast that is reasonably close to the forecast using the AFN equation. Explain how each of the following factors would affect the accuracy of financial forecasts based on the AFN equation:

(1) Economies of scale in the use of assets and

(2) Lumpy assets.

Betty Simmons, the new financial manager of Southeast Chemicals (SFC), a Georgia producer of specialized chemicals for use in fruit orchards, must prepare a financial forecast for 2010. SEC's 2009 sales were $2 billion, and the marketing department is forecasting a 25% increase for 2010. Simmons thinks the company was operating at full capacity in 2009, but, she is not sure about this. The 2009 financial statements, plus some other data, are shown below:

A. 2009 Balance sheet (Millions of Dollars)

B. 2009 Income Statement (Millions of Dollars)

C. KeyRatios

Percent et Sales oe Sales Cash and secures 5 20) Accounts aable atd acerls Nutis paryahle 5% 12% oal rey Rahties Lons m de Common ock Ritained eanting 740 500 5 200 100 Net fed asiets 25% eil asets 51.00 Tual iblties and etquity 2.304 B. 2009 Income Statement (Millions of Dollars) Percent of Sales Sales Cost of goods sold (COGS Sales, general, and administrative costs SGA $2,000.00 1.200.00 60%, 35% Eanings before interest and taxes Interest Famings hefore taxes Taxes 140%, Net income Dividends (40%) Addtion to retained eamings $ 100.00 1000 $ 9000 36.00 S 540o 21.60 S 32.40 C. Key Ratios SEC Industry Profit margin Return on equity Days sales outstanding 1365 days Inventory turnover Fixed assets turnover Debt/assets Times interest erned Curent ratio Return nn invrstnd rapital NOPAT/Operating capital, 2.7V% 2.21% 4.00% 1 5.60%, 43.80 days 32.00 days 8.33 4.00 11.00 5.00 36.00% 9.40 3.00 14 00 30.00% 10.00 2.50 6 67%