Nichols Company sells a product for £20. Budgeted sales for the first quarter of the current year are as follows: The company wants to maintain an inventory of finished units equal to 30 percent 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 percent 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

Nichols Company sells a product for £20. Budgeted sales for the first quarter of the current year are as follows: The company wants to maintain an inventory of finished units equal to 30 percent 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 percent 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

Quizplus · Accepted Answer

To determine the budgeted production in units for February, we need to calculate the following:

1. Budgeted sales for February: 
- March sales = 7,000 units x 0.7 (30% inventory) = 4,900 units 
- April sales = 4,900 units x 0.7 (30% inventory) = 3,430 units 
- Total budgeted sales for February = 4,900 + 3,430 = 8,330 units

2. Production needs for February: 
- Budgeted sales for February = 8,330 units 
- Add desired ending finished goods inventory (30% of March sales): 4,900 x 0.3 = 1,470 units 
- Total production needs = 8,330 + 1,470 = 9,800 units

3. Raw materials needed for production: 
- Each unit requires 2 pounds of raw material 
- Raw materials needed for production = 9,800 units x 2 pounds per unit = 19,600 pounds

4. Raw materials inventory: 
- Production needs for March = 7,000 units x 0.1 (10% inventory) x 2 pounds per unit = 1,400 pounds 
- Production needs for April = 4,900 units x 0.1 (10% inventory) x 2 pounds per unit = 980 pounds 
- Total raw materials inventory needed for February = 1,400 + 980 = 2,380 pounds

Based on the above calculations, the budgeted production in units for February would be 9,800 units. Therefore, the correct answer is B) 3,100 units.

Nichols Company Sells a Product for £20