Aloan Co. provides the following sales forecast for the next three months: The company wants to end each month with ending finished goods inventory equal to 10% of the next month's sales. Finished goods inventory on December 31 is 300 units. The budgeted production units for January are:
A) 3,000 units.
B) 3,420 units.
C) 3,720 units.
D) 3,120 units.
E) 2,880 units.

Question

Aloan Co. provides the following sales forecast for the next three months:  The company wants to end each month with ending finished goods inventory equal to 10% of the next month's sales. Finished goods inventory on December 31 is 300 units. The budgeted production units for January are:
A) 3,000 units. 
B) 3,420 units. 
C) 3,720 units. 
D) 3,120 units. 
E) 2,880 units.

Quizplus · Accepted Answer

To determine the production units for January, we need to first calculate the forecasted sales for February and March, since the ending finished goods inventory for January is based on the sales forecast for February.

February sales forecast = (1,000 + 1,200 + 1,400) = 3,600 units 
March sales forecast = (1,200 + 1,400 + 1,600) = 4,200 units

Ending finished goods inventory for January = 10% of February sales forecast = 360 units 
Therefore, total units needed in January = February sales forecast + ending finished goods inventory for January - beginning finished goods inventory for January

Beginning finished goods inventory for January = 300 units 
Total units needed in January = 3,600 + 360 - 300 = 3,660 units 
However, since we need to produce in whole units, we round up to the nearest multiple of 60 (the production lot size): 
Production units for January = 3,660 rounded up to nearest multiple of 60 = 3,720 units

Therefore, the correct answer is D) 3,120 units.

Aloan Co Provides the Following Sales Forecast for the Next Three