Question

7. Look at two scenarios, details of which are provided below, for monthly inventories and sales for a company producing cereal. In both scenarios, the company’s sales are the same.

a. Calculate the inventory investment during each month and the resulting stock of inventory at the beginning of the following month for both scenarios.

b. Does maintaining constant production lead to greater or lesser fluctuations in the stock of inventory? Explain.

Scenario A
Month	Start-of-the-Month Inventory Stock	Production	Sales	Inventory Investment
Jan.	50	50	45
Feb.		50	55
Mar.		50	80
Apr.		50	50
May		50	40

Scenario B
Month	Start-of-the-Month Inventory Stock	Production	Sales	Inventory Investment
Jan.	50	45	45
Feb.		55	55
Mar.		80	80
Apr.		50	50
May		40	40

Answer 1

Working notes:

(1) Inventory investment, Month N = Start-of-month N inventory + Production in month N - Sales in month N

(2) Start-of-month Inventory, Month (N+1) = Inventory investment, Month N

(a)

(Scenario - A)

Scenario A
Month		Production	Sales
	Start-of-the-Month			Inventory
Jan.	50	50	45	55
Feb.	55	50	55	50
Mar.	50	50	80	20
Apr.	20	50	50	20
May	20	50	40	30

(Scenario - B)

Scenario B
Month		Production	Sales
	Start-of-the-Month			Inventory
	Inventory Stock			Investment
Jan.	50	45	45	50
Feb.	50	55	55	50
Mar.	50	80	80	50
Apr.	50	50	50	50
May	50	40	40	50

(b)

As is seen from part (a), Maintain production constant leads to higher fluctuation in end-of-month inventory level.