Homework SourseB As the operations manager for Valley Kayaks as described i
B. As the operations manager for Valley Kayaks (as described in the previous question), 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 25 percent (a major investment to you). She has also given the information in the following table. How would you assess this proposal from marketing? Your top management requires that any change must achieve a ROA greater than 30%. Show your calculations and then determine if the projected change in ROA justify the inventory investment?
Category Current Values Estimated Impact of TQM
Sales $2,000,000 5% +(improvement)
Cost of good sold $1,500,000 0%
Variable expenses $300,000 8.25% - (reduction)
Fixed expenses $100,000 0%
Inventory $300,000 25% -
Accounts receivable $100,000 0%
Other current assets $500,000 0%
Fixed assets $400,000 0%
Solution
Current ROA
Net Income = Sales - Cost of Goods Sold - Variables Expenses - Fixed expenses
= 2000000 - 1500000 - 300000 - 100000
= $ 100,000
Total Assets = Inventory + Accounts Receivable + Other current asstes + Fixed assets
= 300000 + 100000 + 500000 + 400000
= $ 1,300,000
ROA = Net income / Total assets
= 100000 / 1300000
= 7.7%
ROA after improvement
Net Income = 2000000*1.05 - 1500000 - 300000*(1-0.0825) - 100000
= $ 224,750
Total Assets = 300000*(1+0.25) + 100000 + 500000 + 400000
= $ 1,375,000
ROA = 224750 / 1375000
= 16.35 %
The change resulted in an ROA of 16.35% , which is still short of 30%, hence the projected change in ROA does not justify the investment.
