Question

Down Under Products’ sales budget for the next four months is as follows:

Unit /Sales
April /50,000
May/ 75,000
June/ 90,000
July/ 80,000
The company wants its ending inventory levels to equal 10% of the following month’s unit sales. The inventory at the end of March was 5,000 units.

Required:
Prepare a production budget, by month and in total, for the second quarter.

Answer 1

To prepare a production budget, we need to calculate how many units Down Under Products needs to produce each month. The formula to calculate the required production for each month is as follows:

\[
\text{Required Production} = \text{Sales} + \text{Ending Inventory} - \text{Beginning Inventory}
\]

Where:
- **Sales** are the unit sales for the month.
- **Ending Inventory** is 10% of the following month's sales.
- **Beginning Inventory** is the ending inventory from the previous month.

### Step-by-Step Calculation

**1. Ending Inventory for Each Month:**
- For April, ending inventory is 10% of May's sales:
\[
\text{Ending Inventory (April)} = 10\% \times 75,000 = 7,500
\]

- For May, ending inventory is 10% of June's sales:
\[
\text{Ending Inventory (May)} = 10\% \times 90,000 = 9,000
\]

- For June, ending inventory is 10% of July's sales:
\[
\text{Ending Inventory (June)} = 10\% \times 80,000 = 8,000
\]

**2. Beginning Inventory:**
- The beginning inventory for April is given as 5,000 units.
- The beginning inventory for May will be the ending inventory from April, which is 7,500 units.
- The beginning inventory for June will be the ending inventory from May, which is 9,000 units.

### Production Budget Calculation

| Month | Sales | Ending Inventory | Beginning Inventory | Required Production |
|---------|---------|-------------------|---------------------|---------------------|
| April | 50,000 | 7,500 | 5,000 | |
| May | 75,000 | 9,000 | 7,500 | |
| June | 90,000 | 8,000 | 9,000 | |

**Calculating Required Production:**

1. **April:**
\[
\text{Required Production (April)} = 50,000 + 7,500 - 5,000 = 52,500
\]

2. **May:**
\[
\text{Required Production (May)} = 75,000 + 9,000 - 7,500 = 76,500
\]

3. **June:**
\[
\text{Required Production (June)} = 90,000 + 8,000 - 9,000 = 89,000
\]

### Final Production Budget Table

| Month | Sales | Ending Inventory | Beginning Inventory | Required Production |
|---------|---------|-------------------|---------------------|---------------------|
| April | 50,000 | 7,500 | 5,000 | 52,500 |
| May | 75,000 | 9,000 | 7,500 | 76,500 |
| June | 90,000 | 8,000 | 9,000 | 89,000 |

### Total Production Requirement for Q2:

**Total Required Production = Production in April + Production in May + Production in June**
\[
\text{Total Required Production} = 52,500 + 76,500 + 89,000 = 218,000
\]

### Summary:
- **April Production**: 52,500 units
- **May Production**: 76,500 units
- **June Production**: 89,000 units
- **Total Production for Q2**: 218,000 units

This is the production budget for Down Under Products for the second quarter.