A is corrent. The level of sales for the company is calculated using both ratios as follows: Total assets = Total debt / .70 = $1,000,000 / .70 = $1,428,571.40 and Sales = 3.5 x (Total assets) = 3.5 x ($1,428,571.40) = $5,000,000.00.
B is incorrect. This solution is obtained if sales is calculated by dividing total assets by 3.5, rather than multiplying by 3.5, as follows: Total assets = Total debt / (.70) = $1,000,000 / (.70) = $1,428,571.40 and Sales = Total assets / 3.5 = $1,428,571.40 / 3.5 = $408,163.26.
C is incorrect. This solution is obtained by misinterpreting both ratios as their reciprocal, so that in the first part of the calculation total assets is calculated as total debt multiplied by .70, and in the second part of the calculation, sales is calculated by dividing total assets by 3.5, as follows: Total assets = Total debt x (.70) = $1,000,000 x (.70) = $700,000 and Sales = Total assets / 3.5 = $700,000 / 3.5 = $200,000.
D is incorrect. This solution is obtained if total assets is calculated as total debt multiplied by .70 rather than divided by .70, as follows: Total assets = Total debt x (.70) = $1,000,000 x (.70) = $700,000 and Sales = 3.5 x (Total assets) = 3.5 x ($700,000) = $2,450,000.
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