(Forecasting

inventories)

Findlay Instruments produces a complete line of medical instruments used by plastic surgeons and has experienced rapid growth over the past 5 years. In an effort to make more accurate predictions of its financing requirements, Findlay is currently attempting to construct a financial-planning model based on the percent of sales forecasting method. However, the firm's chief financial analyst is concerned that the projections for inventories will be seriously in error. She recognizes that the firm has begun to accrue substantial economies of scale in its inventory investment and has documented this fact in the following data and calculations:

YEAR	SALES ($000)	INVENTORY ($000)	% OF SALES
2014	$14,000	$1,070	7.64%
2015	17,000	1,110	6.53%
2016	16,500	1,100	6.67%
2017	19,000	1,130	5.95%
2018	24,000	1,190	4.96%
			Average 6.35%

.

a. Plot Findlay's sales and inventories for the past 5 years. What is the relationship between these two variables?

b. Estimate firm inventories for

2019,

when firm sales are projected to reach

$40

million. Use the average percentage of sales for the past 5 years, the most recent percentage of sales, and your evaluation of the true relationship between the sales and inventories from part a to make three predictions.

a. Findlay's sales and inventory balances for the past 5 years are plotted in the figure below.

The image is a graph that shows the sales and the inventory balances for a firm for the past five years. The horizontal axis measures sales in thousands of dollars; the axis values range from 10,000 thousand dollars to 40,000 thousand dollars, in increments of 5,000 thousand dollars. The vertical axis measures inventory in thousands of dollars; the axis values range from 1,000 thousand dollars to 1,500 thousand dollars, in increments of 100 thousand dollars. There are five points marked on the graph. The first point corresponds to sales of 14,000 thousand dollars and inventory of 1,070 thousand dollars. The second point corresponds to sales of 17,000 thousand dollars and an inventory of 1,110 thousand dollars. The third point corresponds to sales of 16,500 thousand dollars and an inventory of 1,100 thousand dollars. The fourth corresponds to sales of 19,000 thousand dollars and an inventory of 1,130 thousand dollars. The fifth point corresponds to sales of 24,000 thousand dollars and inventory of 1,190 thousand dollars.

Which of the following best defines the relationship between these two variables?(Select the best choice below.)

A.

A parabolic function.

B.

A logarithmic cylinder function.

C.

A hyperbolic function.

D.

A linear function.

E.

An exponential function.

b. Use the average percentage of sales for the past 5 years to make the prediction. What are the firm's projected inventories for

2019

when the sales are projected to reach

$40

million?

$nothing

(Round to the nearest dollar.)Use the most recent percentage of sales to make the prediction. What are the firm's projected inventories for

2019

when the sales are projected to reach

$40

million?

$nothing

(Round to the nearest dollar.)Use your evaluation of the true relationship between the sales and inventories from part a to make the prediction. What are the firm's projected inventories for

2019

when the sales are projected to reach

$40

million?

$nothing

(Round to the nearest dollar.)