A. You are the operations manager for a small kayak and canoe manufacturer (Valley Kayaks) locate on the Pacific Northwest (Oregon). Lately your company has experience product quality problems. Simply put, the kayaks that you produce occasionally have defects and require rework. Consequently, you have decided to assess the impact of introducing a quality management (TQM) program. After discussing the potential effects with representatives from marketing, finance, accounting, and quality, you arrive at a set of estimates (contained in the following table). Top management has told you that it will accept any proposal that you come up with, provided that it improves the return on assets measure by at least 30%. Show your calculations and then determine if you would go forward with this proposal?

Category Current values Estimated Impact of TQM

Sales $2,000,000 5%+ (improvement)

Cost of goods sold $1,500,000 0%

Variable expenses $300,000 8.25% - (reduction)

Fixed expenses $100,000 0%

Inventory $300,000 25% -

Accounts receivable $100,000 0%

Other current assets $500,000 0%

Fixed assets $400,000 0

B. As the operations manager for Valley Kayaks (as described in the previous question), you find yourself faced with an interesting situation. Marketing has informed you that they have lost a number of sales because of a lack of inventory. Kayaks, being seasonal in nature, have to be in stock at your dealers if they are to be sold (customers are not willing to wait). The director of marketing proposes that you increase inventories by 25 percent (a major investment to you). She has also given the information in the following table. How would you assess this proposal from marketing? Your top management requires that any change must achieve a ROA greater than 30%. Show your calculations and then determine if the projected change in ROA justify the inventory investment?

Category                                      Current values                                                      Proposed Impact of Inventory Increase

Sales                                            $2,000,000                                                               25%+ (improvement)

Cost of goods sold                       $1,500,000                                                               0%

Variable expenses                            $300,000                                                              10% - reduction (why)?

Fixed expenses                                 $100,000                                                             15% + (increase)

Inventory                                           $300,000                                                              25% +

Accounts receivable                          $100,000                                                               0%

Other current assets                          $500,000                                                               0%

Fixed assets                                       $400,000                                                              0%