Question

(a) Consider the following financial data (in millions of dollars) for Costello
Laboratories over the period of 2014–2018:
Year Sales Net income Total assets Common
equity
2014 $3,800 $500 $3,900 $1,800
2015 4,400 650 4,400 2,100
2016 5,000 750 4,800 2,500
2017 5,400 860 4,900 2,700
2018 6,200 1,000 5,600 2,800
Using the Du Pont System, describe the changes in the return on equity from year to
year.
(b) Construct the common size balance sheet for Grisham Company for 2017:
Balance Sheet (in millions)
Assets Liabilities
Cash $50 Current liabilities $30
Accounts receivable $30 Long-term debt $90
Inventory $80 Equity $240
Plant and equipment $200 Total liabilities and equity $360
Total assets $360

(c) Redan Manufacturing uses 2,500 switch assemblies per week and then reorders
another 2,500. If the relevant carrying cost per switch assembly is $10, and the fixed
order cost is $2,400, is Redan’s inventory policy optimal? Why or why not?

Answer 1