Question

Which inventory policy should a company choose and why? (Budget Scenario A, B, or C)

Budget Scenario A

	January	February	March	Total
Sales ($40 per unit)	$3,600,000.00	$3,200,000.00	$2,800,000.00	$9,600,000.00
Less : Cost of goods sold ($15 per unit)	$1,350,000.00	$1,200,000.00	$1,050,000.00	$3,600,000.00
Gross Margin	$2,250,000.00	$2,000,000.00	$1,750,000.00	$6,000,000.00
Less : Operating Expenses
Wages ($15 per unit)	$1,350,000.00	$1,200,000.00	$1,050,000.00	$3,600,000.00
Rent	$37,000.00	$37,000.00	$37,000.00	$111,000.00
Advertising	$4,000.00	$4,000.00	$4,000.00	$12,000.00
Depreciation	$6,000.00	$6,000.00	$6,000.00	$18,000.00
Operating Income	$853,000.00	$753,000.00	$653,000.00	$2,259,000.00
Less : Interest on Loan
Net Income	$853,000.00	$753,000.00	$653,000.00	$2,259,000.00

-----------------------------------

Budget Scenario B

Budgeted Income for Jan-Mar				Total
Sales		(90000+80000+70000)*40		$9,600,000
Less: Cost of Goods Sold		(90000+80000+70000)*15		$3,600,000
Less: Labor		(90000+80000+70000)*15		$3,600,000
Less: Rent		37000*3		$111,000
Less: Advertising		4000*3		$12,000
Less: Depreciation		6000*3		$18,000
Net Operating Income				$2,259,000
Less: Interest Expense		From Cash Budget
Net Income				$2,259,000

--------------------

Budget Scenario C

January	February	March	End
Units sold	90,000	80,000	70,000	240,000
Sales revenue (Units sold *40)	3,600,000	3,200,000	2,800,000	$9,600,000
Less: Cost of Goods sold (Units sold *15)	1,350,000	1,200,000	1,050,000	$3,600,000
Gross Profit	2,250,000	2,000,000	1,750,000	$6,000,000
Less: Operating expense
Wages expense or Labor cost (Units sold*15)	1,350,000	1,200,000	1,050,000	$3,600,000
Rent expense	37,000	37,000	37,000	$111,000
Advertising expense	4,000	4,000	4,000	$12,000
Depreciation Expense	6,000	6,000	6,000	18,000
Total operating expense	1,397,000	1,247,000	1,097,000	$3,741,000
Operating Profit	853,000	753,000	653,000	2,259,000

Answer 1

PROPOSAL -A:

The NPV of the Factory as follows:

The above proposal can be accepted,since NPV is positive.

Working :

Depreciation = 10,000000 / 10 years = $1000000

Profit =5% on sales

Sales inceresed by 30% on current sales = $10,000000*30% = 3000000

Threfore Porfit = $3000000*5%

= $1500000

To determine cash flow:
Profit	1500000
Depreciation	1000000
Cash flow	2500000

PROPOSAL-B

PROPOSAL "C":

The above all proposal have poistive NPV ,so that we can Impliment these.