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:

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 2011, when firm sales are projected to reach $ 30 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.

Transcribed Image Text:

YEAR 2006 2007 2008 2009 2010 SALES ($000) 15,000 18,000 17,500 20,000 25,000 INVENTORY ($000) 1,150 1,180 1,175 1200 1,250 % OF SALES 767% 6.56% 6.71% 6.00% 5.00% Average 6.39%