Question
As the operations manager for Valley Kayaks (as described in the previous problem), you find yourself faced with an interesting situation. Marketing has informed you
As the operations manager for Valley Kayaks (as described in the previous problem), you find yourself faced with an interesting situation. Marketing has informed you that they have lost a number of sales because of a lack of inventory. Kayaks, being seasonal in nature, have to be in stock at your dealers if they are to be sold (customers are not willing to wait). The director of marketing proposes that you increase inventories by 15 percent (a major investment to you). She has also given the information in the following table. Use Figure 2.3.
Category | Current Values | Proposed Impact of Inventory Increase | ||||||
Sales | $ | 3,570,000 | 35 | % | + (improvement) | |||
Cost of goods sold | $ | 2,550,000 | 0 | % | ||||
Variable expenses | $ | 510,000 | 10 | % | reduction | |||
Fixed expenses | $ | 178,500 | 15 | % | + (increase) | |||
Inventory | $ | 470,000 | 15 | % | + | |||
Accounts receivable | $ | 117,000 | 0 | % | ||||
Other current assets | $ | 560,000 | 0 | % | ||||
Fixed assets | $ | 555,000 | 0 | % | ||||
a) Using the information given above what is the Total Return on Assets in PERCENT (%) for the Current Values column?
b) What would the NEW values be for the above table, given the proposed impact of inventory increase (NOT IN PERCENT!)?
c) What is the total Return on Assets for the NEW values (IN PERCENT %)?
d) Would the projected change in Return on Assets justify the inventory investment?
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