Solar Electronics has enjoyed tremendous sales growth during the last 10 years. However, even though sales have steadily increased, the company’s CEO, Dana Byrnes, is concerned about certain aspects of its performance. She has called a meeting with the corporate controller and the vice presidents of finance, operations, sales, and marketing to discuss the company’s performance. Dana begins the meeting by making the following observations:
We have been forced to take significant write-downs on inventory during each of the last three years because of obsolescence. In addition, inventory storage costs have soared. We rent four additional warehouses to store our increasingly diverse inventory. Five years ago inventory represented only 20% of the value of our total assets. It now exceeds 35%. Yet, even with all of this inventory, “stockouts” (measured by complaints by customers that the desired product is not available) have increased by 40% during the last three years. And worse yet, it seems that we constantly must discount merchandise that we have too much of.
Dana asks the group to review the following data and make suggestions as to how the company’s performance might be improved.
Instructions
Using the information provided, answer the following questions.
a. Compute the current ratio, gross profit rate, profit margin, inventory turnover, and days in inventory for 2020, 2021, and 2022.
b. Discuss the trends and potential causes of the changes in the ratios in part (a).
c. Discuss potential remedies to any problems discussed in part (b).
d. What concerns might be raised by some members of management with regard to your suggestions in part (c)?
