The following forecasted sales pertain to Nyak Company: Month Sales
April $200,000
May 250,000
June 150,000
July 100,000
Collection pattern:
60% in month of sale
40% in month following the sale
Accounts receivable as of March 31 $35,000
Finished goods inventory as of March 31 4,000 units
The company has a selling price of $10 per unit and expects to maintain ending inventories equal to 20% of the next month's sales. How many units are expected to be produced in April?

Question

Quizplus · Accepted Answer

To determine the production needs for April, we first need to find the expected sales for May, which is $250,000. Since the company expects to maintain ending inventories equal to 20% of the next month's sales, the ending inventory for May should be 20% x $250,000 = $50,000 or 5,000 units. Therefore, the company needs to produce enough to cover sales in May (250,000/10 = 25,000 units) plus the required ending inventory (5,000 units), which totals to 30,000 units.
Next, we need to adjust for the forecasted sales in June, July, and the collection pattern. The revenue expected to be collected in July is 40% of June's sales ($150,000 x 40% = $60,000) and the revenue expected to be collected in August is 60% of July's sales ($100,000 x 60% = $60,000). Therefore, the total revenue expected to be collected in May is $250,000 + $60,000 + $60,000 = $370,000.
To calculate the number of units needed to be produced in April, we subtract the expected sales in May that will be collected in June and July from the total revenue expected to be collected in May:
$370,000 - ($250,000 x 60%) = $220,000
$220,000 / $10 per unit = 22,000 units needed to be produced in April.
However, we also need to subtract the units currently in finished goods inventory as of March 31, which is 4,000 units. Therefore, the net production needs for April is 22,000 units - 4,000 units = 18,000 units. Adding the required 20% ending inventory (5,000 units) brings the total production needed to 23,000 units.
Finally, we round up to the nearest thousand, thus the expected production for April is 21,000 units.

The Following Forecasted Sales Pertain to Nyak Company: Month Sales