Question

A company budgeted unit sales of 154000 units for January, 2017 and 150000 units for February 2017. The company has a policy of having an inventory of units on hand at the end of each month equal to 30% of next month's budgeted unit sales. If there were 46200 units of inventory on hand on December 31, 2016, how many units should be produced in January, 2017 in order for the company to meet its goals?

Answer 1

The equation for finding out the number of units to be produced is as follow:

Budgeted units sales + planned ending inventory - beginning inventory = units to be produced.

In the above question,

Beginning inventory on January = 46,200 units.

Budgeted units sales in January = 154,000 units.

Ending inventory for January is equal to the 30% of February months budgeted unit sales.

Budgeted unit sales of February = 150,000

30 % of units in February. = 45,000 units.

The ending inventory on January = 45,000 units

Now, the number of units to be produced on January will be,

Units to be produced = 154,000 + 45,000 - 46,200

Units to be produced = 152,800 units.

So the company need to produce 152,800 units in the month of January.

Hence, answer is 152,800 units.

SUMMARY :

Budgeted units sales of January = 154,000 units.

Ending inventory = 45,000 units.

So the company need a total production of 199,000 units ( 154,000 + 45,000) in January. But we have 46,200 units as beginning inventory. So units to be produced in January is 152,800 units respectively ( 199,000 - 46,200).

Hence, 152,800 units is the correct answer.