Hector Electronics has enjoyed tremendous sales growth during the last 10 -

years. However, even though sales have steadily increased, the company’s CEO, Karen Stevens, is concerned about certain aspects of its performance. She has called a meeting with the corporate controller and the vice presidents of finance, operations, sales, and marketing to discuss the company’s performance. Karen begins the meeting by making the following observations:

“We have been forced to take significant write-downs on inventory during each of the last three years because of obsolescence. In addition, inventory storage costs have soared. We rent four additional warehouses to store our increasingly diverse inventory. Five years ago inventory represented only 20% of the value of our total assets. It now exceeds 35%. Yet, even with all of this inventory, “stockouts”

(measured by complaints by customers that the desired product is not available)

have increased by 40% during the last three years. And worse yet, it seems that we constantly must discount merchandise that we have too much of.”

Karen asks the group to review the following data and make suggestions as to how the company’s performance might be improved.

(in millions) 2007 2006 2005 2004 Inventory Raw materials $242 $198 $155 $128 Work in process 116 ve 49 33 Finished goods 567 482 398 25h Total inventory $925 $757 $602 $418 Current assets $1,800 $1,623 $1,183 $841 Total assets $2,643 $2,523 $2,408 $2,090 Current liabilities $600 $590 $525 $420 Sales $9,428 $8,974 $7,536 $6,840 Cost of goods sold $6,128 $5,474 $4,145 $3,507 Net income $754 $987 $979 $958 312 CHAPTER 6 Reporting and Analyzing Inventory Instructions Using the information provided, answer the following questions.

(a) Compute the current ratio, gross profit rate, profit margin ratio, inventory turnover ratio, and days in inventory for 2005, 2006, and 2007.

(b) Discuss the trends and potential causes of the changes in the ratios in part (a).

(c) Discuss potential remedies to any problems discussed in part (b).

(d) What concerns might be raised by some members of management with regard to your suggestions in part (c)?

COMMUNICATION ACTIVITIES