Question

A company budgeted unit sales of 204,000 units for January, 2017 and 240,000 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 61,200 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

Units to be produced in January 2017 = Units required for sales in January 2017 + Units required in ending inventory in January 2017 - Units in beginning inventory in January 2017

Now, let us find out each value:

Units required for sales in January 2017 = 204000

Units required in ending inventory in January 2017 = 30% of sales units of February 2017

Units required in ending inventory in January 2017 = 30% * 240000 = 72000

Units in beginning inventory = Ending units in December 31, 2016 = 61200

Now, Putting all these values in the equation above, we get,

Units to be produced in January 2017 = 204000 + 72000 - 61200 = 214800