(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 (Sarah Macias) 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
2011	$16,000	$1,230	7.69%
2012	$19,000	$1,250	6.58%
2013	$18,500	$1,240	6.70%
2014	$21,000	$1,260	6.00%
2015	$26,000	$1,300	5.00%
			Average 6.39%

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

ANSWER: A LINEAR FUNCTION

b. Estimate firm inventories for 2016, 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.

1. Use the average percentage of sales for the past 5 years to make the prediction. What are the firm's projected inventories for 2016 when the sales are projected to reach $40 million?

2. Use the most recent percentage of sales to make the prediction. What are the firm's projected inventories for 2016 when the sales are projected to reach $40 million?

3. 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 2016 when the sales are projected to reach $40 million?