Question

Question: H20 Sports is a merchandiser of three different products. The company’s March 31 inventories are water skis, 40,000 units; tow ropes, 90,000 units; and life jackets, 150,000 units. Management believes inventory levels are too high for all three products. As a result, a new policy dictates that ending inventory in any month should equal 10% of the expected unit sales for the following month. Expected sales in units for April, May, June, and July follow.

Budgeted Sales in Units
	April	May	June	July
Water skis	70,000	90,000	130,000	100,000
Tow ropes	100,000	90,000	110,000	100,000
Life jackets	160,000	190,000	200,000	120,000

Required

1. Prepare a merchandise purchases budget (in units) for each product for each of the months of April, May, and June.

Analysis Component

2. What business conditions might lead to inventory levels becoming too high?

Short answer

Answer

1.

Purchases (units)
	Water Skis	Tow ropes	Life Jackets
April	39,000	19,000	29,000
May	94,000	92,000	191,000
June	127,000	109,000	192,000

2.The management might have decided upon the wrong timing of purchases which may pile up inventory without the earlier ones being used.

Step-by-step solution

Meaning of Purchase budget

A purchase budget list the units purchased to meet sales demand and maintain target stockat the end of the period.Add sales with ending inventory and subtract with opening inventory to find the units purchased.

(1) Preparing merchandise purchase budget

For Water Skis

Particulars	April	May	June
Sales	70,000	90,000	130,000
Add: Ending inventory	9,000	13,000	10,000
Less: Beginning inventory	40,000	9,000	13,000
Purchases (units)	39,000	94,000	127,000

For Tow ropes

Particulars	April	May	June
Sales	100,000	90,000	110,000
Add: Ending inventory	9,000	11,000	10,000
Less: Beginning inventory	90,000	9,000	11,000
Purchases (units)	19,000	12,000	109,000

For Life Jackets

Particulars	April	May	June
Sales	160,000	190,000	200,000
Add: Ending inventory	19,000	20,000	12,000
Less: Beginning inventory	15,000	19,000	20,000
Purchases (units)	164,000	191,000	192,000

Notes for Work:

• Each month's ending stock rises to 10% of the other month's sales.
• The beginning stock of the following month is the finishing stock of the past month.

(2) explaining the analysis component

High stock levels show that the company incorporates a low turnover rate. It shows that the company is having issues offering its products, or market demand is decreasing. When deals drop, the sum of stock on hand rises. A high stock level might show a company's poor purchasing policy. The administrator may have chosen the incorrect time to create purchases, causing products to pile up without being used.