Mark X

2 sales. Finally, the tax benefits associated with horse breeding were reduced, 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 2008 and 2009 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 2009 and improved its already favorable credit terms. As a result, sales growth did remain high by industry standards through the third quarter of 2009, 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 2009. To finance its rising inventories and receivables, Mark X turned to the bank for a long-term loan in 2008 and also increased its short-term credit lines in both 2008 and 2009. 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. Management realized that this was not a particularly wise decision for the long run, but they did not think it would be necessary to follow the policy for very long. They predicted that the national economy would pull out of the weak growth scenario in late 2009. Also, there has been some talk in Congress of killing the luxury tax and even giving some tax benefits back to horse breeders. Thus, the company was optimistic that its stable and...