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Chapter 3: 5BP (page 184)

Antonio Banderos & Scarves make headwear that is very popular in the fall-winter season. Units sold are anticipated as follows:

October

1,250

November

2,250

December

4,500

January

3,500

Total units

11,500

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory build-up.

However, Antonio decides to go with level production to avoid being out of merchandise. He will produce the 11,500 items over four months at a level of 2,875 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 $8 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 1 percent or the monthly rate.)

Short Answer

Expert verified

The ending inventory at the end of October is 1,625 units, November is 2,250 units, December is 625 units, and January is 0 units. The total cost of financing is $360.

Step by step solution

01

Calculation of ending inventory at the end of each month

Month

Units sold

Units produced

Change in inventory

Ending inventory

October

1,250

2,875

1,625

1,625

November

2,250

2,875

625

2,250

December

4,500

2,875

(1,625)

625

January

3,500

2,875

(625)

0

02

Expected sales for next year

Month

Ending inventory

Total cost per unit ($8 per unit)

Inventory financing cost (at 1% per month)

October

1,650

13,000

130

November

2,250

18,000

180

December

625

5,000

50

January

0

0

0

The total financing cost is $360.

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Most popular questions from this chapter

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Total units

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If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory build-up. The production manager thinks the preceding assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 31,500 units over four months at a level of 7,875 per month.

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

b. If the inventory costs $12 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 0.01 as the monthly rate.)

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