Nichols Company sells a product for £20. Budgeted sales for the first quarter of the current year are as follows: $\begin{array}{lr}& \text { Budgeted Sales } \
\text { January } & £ 80,000 \
\text { February } & 50,000 \
\text { March } & 90,000
\end{array}$ The company wants to maintain an inventory of finished units equal to 30 per cent of the following month's sales, and 1,000 units are on hand at the beginning of the year. Each unit requires two pounds of raw material costing £1 per pound. The company maintains a raw materials inventory equal to 10 per cent of the following month's production needs.
Budgeted production in units for February would be
A)2,500.
B)3,100.
C)3,850.
D)4,600.

Question

Quizplus · Accepted Answer

To calculate the budgeted production for February, we first need to determine the desired ending inventory for February and the required production to meet February's sales and inventory needs.1. Calculate the desired ending inventory for February (which is 30% of March's sales in units):$$£90,000 / £20 \times 30\% = 4,500 \times 30\% = 1,350 \text{ units}$$2. Calculate February's sales in units:$$£50,000 / £20 = 2,500 \text{ units}$$3. Calculate the total units needed for February (sales + ending inventory):$$2,500 \text{ (February sales in units)} + 1,350 \text{ (desired ending inventory for February)} = 3,850 \text{ units}$$4. Subtract the beginning inventory for February to find the budgeted production for February. The beginning inventory for February is the desired ending inventory for January, which is 30% of February's sales in units:$$£50,000 / £20 \times 30\% = 2,500 \times 30\% = 750 \text{ units}$$5. Since we have 1,000 units on hand at the beginning of the year, and we need 3,850 units in total for February, we subtract the beginning inventory of February (which is the ending inventory of January and is 750 units) from the total units needed:$$3,850 \text{ (total units needed for February)} - 750 \text{ (beginning inventory for February)} = 3,100 \text{ units}$$Therefore, the budgeted production in units for February is 3,100.