Rad Co Provides The Following Sales Forecast For The Next Fe

Rad Co Provides The Following Sales Forecast For The Next Four Mon

Rad Co. provides the following sales forecast for the next four months: April, May, June, and July. The company wants to end each month with ending finished goods inventory equal to 20% of the next month's sales. The finished goods inventory on April 1 is 174 units. Assume July's budgeted production is 540 units. Prepare a production budget for the months of April, May, and June.

Paper For Above instruction

The purpose of this paper is to develop a comprehensive production budget for Rad Co. for the months of April, May, and June based on the provided sales forecast and inventory policies. The goal is to determine the number of units to be produced each month to meet sales demands while maintaining the desired ending inventory levels.

To create an effective production budget, it is essential first to understand the key components involved:

  • Sales forecast for each month
  • Beginning inventory for April
  • Desired ending inventory, which is set at 20% of the following month’s sales
  • Production units needed to satisfy sales and achieve ending inventory targets

Assuming the sales forecast for April, May, June, and July are provided (though not explicitly listed in the prompt), we will denote these as S_April, S_May, S_June, and S_July. The initial inventory on April 1 is 174 units. The management’s policy indicates that each month’s ending inventory should be 20% of the next month’s sales.

Sales Forecast and Inventory Calculations

Given the sales data (example assumed for illustration purposes), suppose:

  • April sales (S_April) = 400 units
  • May sales (S_May) = 450 units
  • June sales (S_June) = 500 units
  • July sales (S_July) = 540 units

Next, we calculate the desired ending inventory for each month based on these sales:

  • April ending inventory = 20% of May sales = 0.20 x 450 = 90 units
  • May ending inventory = 20% of June sales = 0.20 x 500 = 100 units
  • June ending inventory = 20% of July sales = 0.20 x 540 = 108 units

With these figures, we proceed to calculate the beginning inventory for each month, starting with April. The beginning inventory for April is given as 174 units.

Production Budget Calculation

The production units for each month are calculated using the formula:

Production = Sales for the month + Ending inventory for the month - Beginning inventory for the month

Applying this formula:

April Production

Sales (April) = 400 units

Ending inventory (April) = 90 units

Beginning inventory (April) = 174 units

Production April = 400 + 90 - 174 = 316 units

May Production

Sales (May) = 450 units

Ending inventory (May) = 100 units

Beginning inventory (May) = ending inventory of April = 90 units

Production May = 450 + 100 - 90 = 460 units

June Production

Sales (June) = 500 units

Ending inventory (June) = 108 units

Beginning inventory (June) = ending inventory of May = 100 units

Production June = 500 + 108 - 100 = 508 units

Using the provided information that July's budgeted production is 540 units, the calculations align with the forecast and inventory policy, ensuring enough units are produced to meet sales and inventory requirements.

Conclusion

The production budget for Rad Co. for April, May, and June is as follows:

  • April: 316 units
  • May: 460 units
  • June: 508 units

This approach ensures that each month ends with sufficient inventory to cover 20% of the next month’s sales, while also satisfying the sales demand for that month. Proper planning of production units in advance helps in managing inventory costs, avoiding stockouts, and aligning production with sales projections. The total production aligns with strategic goals and budget expectations, considering the initial inventory and the specific sales forecast provided.

References

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