This is the sales level for the second quarter. It does not take into consideration the beginning and ending inventories. See the correct answer for a complete explanation.
To solve this question, we use the formula for the physical flow of goods: Beginning Inventory + Units Produced ? Units Sold = Ending Inventory Beginning inventory for the second quarter is 20% of the second quarter sales, or 1,600 units (8,000 × .20). The ending inventory for the second quarter is 20% of the third quarter sales, or 2,400 units (12,000 × .20). Plugging numbers into the formula we will get the following: 1,600 + Units Produced ? 8,000 = 2,400 Solving for Units Produced, we get Units Produced = 8,800.
This answer results from using the formula for the physical flow of inventory incorrectly.The correct formula is Beginning Inventory + Units Produced ? Units Sold = Ending Inventory To get this answer, units sold are added and units produced are subtracted. Instead, the number of units produced (the unknown) should be added to beginning inventory and the number of units sold should be subtracted.
This answer results from calculating the beginning inventory as 2,000 units. The beginning inventory is budgeted as 20% of sales of 8,000 units, which is 1,600 units.
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Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter's sales. Budgeted production for the second quarter of the next year would be: