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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 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 10 percent (a major investment to you). She has also given the information in the following table. Use Figure 2.3 Proposed Impact of Inventory Increase Category Sales Cost of goods sold Variable expenses Fixed expenses Inventory Accounts receivable Other current assets Fixed assets Current Values $ 4,340,000 $3,100,000 $ 620,000 $217,000 $462,000 $156,000 $711,000 $435,000 15% 0% 20% 20% 10% 0% 0% 0% +(Improvement) -reduction + (increase) + a.Using the information given, complete the following table and calculate the ROA for current values and new values. (Round "ROA" to 2 decimal places.) Category Current Values New Values Sales Cost of goods sold Variable expenses Fixed expenses Inventory Accounts receivable Other current assets Fixed assets ROA $4,340,000 3,100,000 620,000 217,000 462,000 156,000 711,000 $435,000 b. Would the projected change in ROA justify the inventory investment? Yes No

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