DuraBlend First Aid started operations on January 1, 2017.On that date, the only assets were cash of $13,000, and inventory of $600 consisting of direct materials.The company sells first aid kits for $18 each.Additional information concerning the company's operations follows:
-Variable costs of production are $5 for each kit consisting of direct materials of $2.00, direct labor totaling $1.80, and $1.20 per unit in variable overhead.
-Other expenses include $1 per first aid kit in variable selling expenses, $22,000 per month in fixed production costs, and $14,000 per month in fixed selling and administration costs.
-Sales are collected 40% in the month of sales and 60% in the month after the sale.
-All expenses are paid in the month they are incurred except materials that are paid in the month following purchase.
-The company plans its ending inventory of first aid kits to be 20% of the units to be sold during the next month.Direct material inventory is budgeted to be equal to 10% of the next month's production requirements.
-Sales in units are forecasted as follows: $$\begin{array} { l l }
\text { January } & 6,000 \
\text { February } & 8,000 \
\text { March } & 7,000 \
\text { April } & 9,000
\end{array}$$
How many first aid kits will the company produce in February?

Question

DuraBlend First Aid started operations on January 1, 2017.On that date, the only assets were cash of $13,000, and inventory of $600 consisting of direct materials.The company sells first aid kits for $18 each.Additional information concerning the company's operations follows:
-Variable costs of production are $5 for each kit consisting of direct materials of $2.00, direct labor totaling $1.80, and $1.20 per unit in variable overhead.
-Other expenses include $1 per first aid kit in variable selling expenses, $22,000 per month in fixed production costs, and $14,000 per month in fixed selling and administration costs.
-Sales are collected 40% in the month of sales and 60% in the month after the sale.
-All expenses are paid in the month they are incurred except materials that are paid in the month following purchase.
-The company plans its ending inventory of first aid kits to be 20% of the units to be sold during the next month.Direct material inventory is budgeted to be equal to 10% of the next month's production requirements.
-Sales in units are forecasted as follows: $$\begin{array} { l l } 
\text { January } & 6,000 \
\text { February } & 8,000 \
\text { March } & 7,000 \
\text { April } & 9,000
\end{array}$$
How many first aid kits will the company produce in February?

Quizplus · Accepted Answer

The correct answer is A.The company plans to have ending inventory equal to 20% of the next month's sales.  Sales in March are forecasted to be 7,000 units.  Therefore, the company plans to have 1,400 units (7,000 * 20%) in ending inventory in February.  The company also plans to have direct material inventory equal to 10% of the next month's production requirements.  Production requirements in March are forecasted to be 7,000 units.  Therefore, the company plans to have 700 units (7,000 * 10%) of direct material inventory in February.  The company started with 600 units of direct material inventory and plans to purchase enough materials to cover production requirements for February and March.  Therefore, the company plans to purchase 700 units (7,000 + 7,000 - 600) of direct materials in February.  Variable overhead is applied at a rate of $1.20 per unit.  Therefore, the company plans to incur $8,400 (7,000 * $1.20) of variable overhead in February.  Fixed production costs are $22,000 per month.  Therefore, the company plans to incur $22,000 of fixed production costs in February.  Total manufacturing costs in February are planned to be $38,400 ($8,400 + $22,000 + $8,000).  The company plans to sell 8,000 units in February.  Therefore, the company plans to produce 7,800 units (8,000 - 1,400 + 700) in February.