Suppose Cary Corporation is considering installing a new computer system that would provide tighter control of inventories, accounts receivable, and accounts payable. If the new system is installed, the following data are projected for the indicated balance sheet and income statement accounts:

Accounts receivable $ 395,000

Inventories $700,000

Other fixed assets $150,000

Accounts and notes payable $275,000

Accruals $120,000

Cost of goods sold $3,450,000

Administrative and selling expenses $248,775

P/E ratio 6.0x

How do these changes affect the projected ratios and the comparison with the industry averages? (Note that any changes to the income statement will change the amount of retained earnings; therefore, the model is set up to calculate forecasted retained earnings as retained earnings reported on the balance sheet the previous year plus forecasted net income minus dividends paid. The model also adjusts the cash balance so that the balance sheet balances.)

b. If the new computer were even more efficient than Cary?s management had estimated and thus caused the cost of goods sold to decrease by $125,000 from the projections in part (a),what effect would it have on the company?s financial position?

c. If the new computer were less efficient than Cary?s management had estimated and caused the cost of goods sold to increase by $125,000 from the projections in part (a), what effect would it have on the company?s financial position?

d. Change, one by one, the other items in part (a) to see how each change affects the ratio analysis. Then think about and write a paragraph describing how computer models such as this one can be used to help make better decisions about the purchase of such items as a new computer system.