Question

Kamath-Meier Corporation's CFO uses this equation, which was developed by regressing inventories on sales over the past 5 years, to forecast inventory requirements: Inventories = $22.0 + 0.125(Sales). The company expects sales of $275.0 million during the current year, and it expects sales to grow by 30% next year. What is the inventory forecast for next year? All dollars are in millions. $59.4 $60.0 $54.7 $66.7 $82.0

Answer 1

Answer:

$66.7

Explanation:

Given that,

Regressing inventories on sales is as follow:

Inventories = $22.0 + 0.125(Sales)

Expected sales during the current year = $275 million

Expected growth rate of sales = 30% next year

The inventory forecast for the next year is calculated by substituting the above value of expected sales into the regression equation of inventories.

Expected sales next year:

= Current year sales(1 + Growth rate)

= $275 (1 + 0.3)

= $357.5

Inventory forecast for next year:

= $22.0 + 0.125(Sales)

= $22.0 + (0.125 × $357.5)

= $22 + $44.6875

= $66.6875 or $66.7