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 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 data and calculations shown in the above table.

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 2019, 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 for the level of inventories.

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YEAR SALES ($000) INVENTORY ($000) % OF SALES 2014 $15,000 $1,150 7.67% 2015 18,000 1,180 6.56% 2016 17,500 1,175 6.71% 2017 20,000 1,200 6.00% 2018 25,000 1,250 5.00% Average 6.39%