Mark X

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Financial Analysis and Forecasting 35 MARK X COMPANY (A) Mark X Company manufactures farm and specialty trailers of all types. More than 85 percent of the company’s sales come from the western part of the United States, particularly California, although a growing market for custom horse transport vans designed and produced by Mark X is developing nationally and even internationally. Also, several major boat companies in California and Washington have had Mark X design and manufacture trailers for their new models, and these boat-trailer “packages” are sold through the boat companies’ nationwide dealer networks. Steve Wing, the president of Mark X, recently received a call from Karen Dennison, senior vice president of Wells Fargo Bank.…show more content…
Finally, the Tax Reform Act of 1986 reduced many of the tax benefits associated with horse breeding, leading to a drastic curtailment of demand for new horse transport vans. In light of the softening demand, Mark X had aggressively reduced prices in 1991 and 1992 to stimulate sales. This, the company believed, would allow it to realize greater economies of scale in production and to ride the learning, or experience, curve down to a lower cost position. Mark X’s management had full confidence that national economic policies would revive the ailing economy and that the downturn in demand would be only a short-term problem. Consequently, production continued unabated, and inventories increased sharply. In a further effort to reduce inventory, Mark X relaxed its credit standards in early 1992 and improved its already favorable credit terms. As a result, sales growth did remain high by industry standards through the third quarter of 1992, but not high enough to keep inventories from continuing to rise. Further, the credit policy changes had caused accounts receivable to increase dramatically by late 1992. To finance its rising inventories and receivables, Mark X turned to the bank for a long-term loan in 1991 and also increased its short-term credit lines in both 1991 and 1992. However, this expanded credit was insufficient to cover the asset expansion, so the company began to delay payments of its accounts payable until the second late notice had been received.

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