Detmer Enterprises has budgeted sales for the next five months as follows: Past experience has shown that the ending inventory for each month should be equal to 10% of the next month's sales in units. The inventory on December 31 contained 400 units, which was in excess of the desired level of inventory. The company needs to prepare a Production Budget for the first quarter of the year.
-The desired ending inventory for April is:

Question

Detmer Enterprises has budgeted sales for the next five months as follows:  Past experience has shown that the ending inventory for each month should be equal to 10% of the next month's sales in units. The inventory on December 31 contained 400 units, which was in excess of the desired level of inventory. The company needs to prepare a Production Budget for the first quarter of the year.
-The desired ending inventory for April is:

Quizplus · Accepted Answer

To calculate the desired ending inventory for each month, we need to use the 10% rule.

For example, to find the desired ending inventory for February, we take 10% of March's sales (which is 11,000 units).

Desired ending inventory for February = 10% of 11,000 units = 1,100 units

Using this method, we can calculate the desired ending inventory for each month:

January: 1,000 units 
February: 1,100 units 
March: 1,210 units 
April: 1,331 units

However, we also know that the company has too much inventory on December 31 (400 units). We need to adjust the production budget accordingly to account for this excess inventory.

To do so, we need to subtract the excess inventory from the desired ending inventory for January:

Adjusted desired ending inventory for January = 1,000 units - 400 units = 600 units

Using the 10% rule, we can now calculate the desired ending inventory for each month:

January: 600 units 
February: 660 units 
March: 726 units 
April: 798 units

Therefore, the answer is A) 460 units, which is the desired ending inventory for April if we subtract the excess inventory from the calculations.

Detmer Enterprises Has Budgeted Sales for the Next Five Months