Question

Misusing

the percent of sales

method​)

The Caraway Seed Company has grown rapidly over the last decade and is trying to forecast the​ firm's inventory requirements for the next 5 years. Historical sales and inventories for the last 10 years are found in the popup​ window,

YEAR		SALES		INVENTORIES
2005		​$5,250,000		​$1,590,924
2006		6,200,000		1,724,221
2007		6,940,000		1,899,573
2008		5,650,000		1,530,054
2009		6,255,000		1,772,059
2010		7,100,000		1,919,042
2011		7,350,000		2,010,025
2012		8,010,000		2,006,023
2013		8,775,000		2,292,119
2014		10,390,000		2,537,486
2015		11,500,000
2016		12,000,000
2017		12,500,000
2018		13,000,000
2019		13,500,000

​, along with projected sales for the next 5 years.

a. Use the percent of sales method for forecasting​ Caraway's inventories for the next 5 years if the percent of sales is equal to the average of the percent of sales for the last 10 years.

b. The following​ graph, includes a plot of the historical relationship between inventories and sales along with a line representing the percent of sales forecast. Analyze the forecast line compared to the plot of inventory and sales to see if you see any problems with the percent of sales forecast. Discuss.

a. Using the average of the percent of sales for the last 10​ years, what are the projected inventories for​ 2015?

​$nothing

​ (Round to the nearest​ dollar.)

Using the average of the percent of sales for the last 10​ years, what are the projected inventories for​ 2016?

​$nothing

​ (Round to the nearest​ dollar.)

Using the average of the percent of sales for the last 10​ years, what are the projected inventories for​ 2017?

​$nothing

​ (Round to the nearest​ dollar.)

Using the average of the percent of sales for the last 10​ years, what are the projected inventories for​ 2018?

​$nothing

​ (Round to the nearest​ dollar.)

Using the average of the percent of sales for the last 10​ years, what are the projected inventories for​ 2019?

​ (Round to the nearest​ dollar.)

b. The following graph includes a plot of the historical relationship between inventories and sales along with a line representing the percent of sales forecast.

Analyzing the forecast line compared to the plot of​ inventory, did you see any problems with the percent of sales​ forecast?  ​(Select the best choice​ below.)

A.

​No, the percent of sales line perfectly forecasts inventory levels becuase the relationship between the two variables is very nearly linear.

B.

​Yes, the percent of sales line under forecasts inventory levels for low levels of sales and begins to over predict them for higher levels.

Answer 1