Question

Waterloo, Ltd. manufactures a component used in aircraft navigation systems. Demand has been strong and the executive staff at Waterloo is planning for next year. Yesterday, you were called into a budgeting meeting where production plans are being reviewed. You learn that the inventory policy at Waterloo is to hold one and one-half months’ worth of sales (to avoid issues with transportation disruptions). The sales budget for next year is 660,000 units, spread evenly over the year. Because of an unexpected increase in demand, inventory at the end of this year is expected to be only 30,000 units. The capacity of the plant is 700,000 units annually.

Required:

a. What production level next year will be required to meet the targets? (Do not round intermediate calculations.)

Answer 1

• This year ending inventory is expected to be 30000 units which will be Beginning inventory for next year.
• Desired ending inventory for next year = Yearly sales x 1.5 months / 12 months = 660000 x 1.5/12 = 82500 units
• Answer

Budgeted Year sales	660,000
Add: Desired ending Inventory	82,500
Total needs	742,500
Less: Beginning inventory for next year	30,000
Production level for next year	712,500 = Answer