3. 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 sea- sonal 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 25 percent (a major investment to you). She has also given the information in the following table (top next page). How would you assess this proposal from marketing? Would the projected change in ROA justify the inventory investment?
49
Category
Current Values
Proposed Impact of Inventory Increase
Sales
$2,000,000
25% 1 (improvement)
Cost of goods sold
$1,500,000
0%
Variable expenses
$ 300,000
10% 2 reduction (why?)
Fixed expenses
$ 100,000
15% 1 (increase)
Inventory
$ 300,000
25% 1
Accounts receivable
$ 100,000
0%
Other current assets
$ 500,000
0%
Fixed assets
$ 400,000
0%
