Question

3. Hats and Scarves makes scarves that is very popular in the fall-winter season. Units sold are anticipated as follows:

October ..................................................................1,000

November .............................................................2,000

December ..............................................................4,000

January ...................................................................3,000

Total 10,000 units

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup. However, Hats and Scarves decides to go with level production to avoid being out of merchandise. Hats and Scarves will produce 10,000 items over four months at a level of 2,500 per month.

a. What is the ending inventory at the end of each month? Compare the units sales to the units produced and keep a running total.

b. If the inventory costs $5 per unit and will be financed at the bank at a cost of 12 percent, what are the monthly financing cost and the total for the four months? (Use 1percent per month to finance the inventory)

Answer 1

answer:

a)

Hats and Scarves
months	units sold	units produced	change in inventory	ending inventory
october	1000	2500	1500	1500
november	2000	2500	500	2000
december	4000	2500	-1500	500
january	3000	2500	-500	0

b)

Hats and Scarves
months	ending inventory	total cost ($5 per unit)	inventory financing cost (at 1% per month)
october	1500	7500	75
november	2000	10000	100
december	500	2500	25
january	0	0	0
		total financing cost	200

inventory financing cost in total for four months = $200.

( inventory financing cost for october = $75, inventory financing cost for november = $100, inventory financing cost for december = $25, and inventory financing cost for january = $0)