This answer does not ake into consideration the beginning inventory that does not need to be produced. The beginning inventory will lower budgeted production by 3,300 units.
The first thing to do is figure out how much ending inventory is needed. The company wants to have an ending inventory equal to 10 days of sales. The first quarter sales budget is 67,500 units. Since the company uses a 360 day year, one quarter's sales will be sales for 90 days (360 ÷ 90). Therefore, sales for one day would be 67,500 ÷ 90, or 750 units. Inventory for 10 days would be 10 days × 750 units, or 7,500 units needed in ending inventory. Now we can use the inventory formula to find the number of units to be produced. The inventory formula is: Beginning Inventory + Units Produced or Purchased ? Units Sold = Ending Inventory. Whenever we have 3 of the 4 numbers, we can find the 4th number. Beginning inventory = 3,300 good units (3,500 units minus the 200 obsolete units) Sales = 67,500 units Ending Inventory = 7,500 unit 3,300 + X ? 67,500 = 7,500 X = 71,700
This answer results from using a beginning inventory of 3,500 units. 3,500 units includes the 200 units that are obsolete and which should not be included.
This answer results from dividing the beginning inventory of 3,500 units by 10 to calculate the 10 days of desired ending inventory. The ending inventory should be based on the projected sales. To calculate the ending inventory, divide the 67,500 units that are expected to be sold in the first quarter by 90 days (360 days ÷ 4) to get the number of units sold per day. Use that to calculate the number of units needed for 10 days of sales, and that will be the ending inventory that is needed. Also, the beginning inventory of 3,500 units includes 200 units that are obsolete and will need to be subtracted from the beginning inventory in calculating the budgeted production for the quarter.
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