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Question
exercise 20 - 6 (algo) manufacturing: production budgets lo p1
electro company manufactures transmissions for electric cars. management reports ending finished goods inventory for the first quarter at 84,200 units. the following unit sales are budgeted during the rest of the year: second quarter, 421,000 units; third quarter, 489,000 units; and fourth quarter, 211,000 units. company policy calls for the ending finished goods inventory of a quarter to equal 20% of the next quarters budgeted unit sales.
prepare a production budget for both the second and third quarters that shows the number of transmissions to manufacture.
Step1: Calculate the desired ending inventory for the second quarter
The desired ending inventory of a quarter is 20% of the next quarter's budgeted unit sales. For the second quarter, the next - quarter is the third quarter.
Desired ending inventory (second quarter)=$0.2\times489000 = 97800$ units
Step2: Calculate the total required units for the second quarter
Total required units=Budgeted sales units + Desired ending inventory units
Budgeted sales units (second quarter) = 421000 units
Total required units (second quarter)=$421000 + 97800=518800$ units
Step3: Calculate the units to produce in the second quarter
Units to produce=Total required units - Beginning inventory units
Beginning inventory units (second quarter)=Ending inventory units of the first quarter = 84200 units
Units to produce (second quarter)=$518800-84200 = 434600$ units
Step4: Calculate the desired ending inventory for the third quarter
The next - quarter for the third quarter is the fourth quarter.
Desired ending inventory (third quarter)=$0.2\times211000=42200$ units
Step5: Calculate the total required units for the third quarter
Budgeted sales units (third quarter)=489000 units
Total required units (third quarter)=$489000 + 42200=531200$ units
Step6: Calculate the units to produce in the third quarter
Beginning inventory units (third quarter)=Ending inventory units of the second quarter = 97800 units
Units to produce (third quarter)=$531200 - 97800=433400$ units
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| Item | Second Quarter | Third Quarter |
|---|---|---|
| Next period budgeted sales units | 489000 | 211000 |
| Desired ending inventory units | $0.2\times489000 = 97800$ | $0.2\times211000=42200$ |
| Total required units | $421000 + 97800=518800$ | $489000 + 42200=531200$ |
| Beginning inventory units | 84200 | 97800 |
| Units to produce | $518800-84200 = 434600$ | $531200 - 97800=433400$ |