1. Calculate a few ratios and compare Reed's results with industry averages.
(Some industry averages are shown in Exhibit 4.) What do these ratios indicate?
2. Why does Holmes want Reed's to have an inventory reduction sale, and
what does he think will be accomplished by it?
3. Jim Reed had adopted a very loose working capital policy with higher
current assets than industry averages. If he merely tightens his working
capital policy to the averages, should this affect his sales?
4. Assuming that Reed's can improve its operations to be in line with the industry
averages, construct a 1995 pro forma income statement. Assume that net
sales will be reduced 5 percent to $1,938,000 but that depreciation and amortization
will not change but remain at $32,000.
5. What type of inventory control system would you suggest to Jim Reed?
6. What type of accounts receivable control would you suggest to Jim Reed?
7. Is the increase in sales related to the increase in inventory? (See Exhibit 5.)
8. What is Reed's cost of not taking the suppliers' discounts?
This solution is comprised of a detailed explanation to calculate a few ratios and compare Reed's results with industry averages.