A manufacturing firm is preparing its production budget for the year. Projected sales are as follows: Q1 Q2 Q3 Q4 Sales budget (units) 75 122 203 188 The firm's policy is to have finished goods inventory equal to 25% of next month's projected sales. The opening inventory in Q1 is 120 units. How many units need to be produced in Q3? (hint - you need to remember to calculate the opening inventory for Q3)
Question
A manufacturing firm is preparing its production budget for the year.
Projected sales are as follows:
Q1 Q2 Q3 Q4 Sales budget (units) 75 122 203 188 The firm's policy is to have finished goods inventory equal to 25% of next month's projected sales.
The opening inventory in Q1 is 120 units.
How many units need to be produced in Q3? (hint - you need to remember to calculate the opening inventory for Q3)
Solution
To calculate the number of units to be produced in Q3, we need to consider the projected sales, the firm's policy on finished goods inventory, and the opening inventory for Q3.
Step 1: Calculate the ending inventory for Q2, which will be the opening inventory for Q3. According to the firm's policy, the ending inventory should be 25% of the next quarter's projected sales. So, the ending inventory for Q2 = 25% of Q3 sales = 25/100 * 203 = 50.75 units. Since we can't have a fraction of a unit, we'll round this up to 51 units.
Step 2: Calculate the total number of units needed in Q3. This is the sum of the projected sales for Q3 and the desired ending inventory for Q3 (which is 25% of Q4 sales). So, total units needed = Q3 sales + 25% of Q4 sales = 203 + (25/100 * 188) = 203 + 47 = 250 units.
Step 3: Subtract the opening inventory for Q3 (which is the ending inventory from Q2) from the total number of units needed to find out how many units need to be produced in Q3. So, units to be produced = total units needed - opening inventory = 250 - 51 = 199 units.
So, the firm needs to produce 199 units in Q3.
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