Question

The Volt Battery Company has forecast its sales in units as follows:

January	1,300	May	1,850
February	1,150	June	2,000
March	1,100	July	1,700
April	1,600

Volt Battery always keeps an ending inventory equal to 110 percent of the next month’s expected sales. The ending inventory for December (January’s beginning inventory) is 1,460 units, which is consistent with this policy.

Materials cost \(14 per unit and are paid for in the month after purchase. Labor cost is \)7 per unit and is paid in the month the cost is incurred. Overhead costs are \(8,500 per month. Interest of \)8,500 is scheduled to be paid in March, and employee bonuses of $13,700 will be paid in June.

Prepare a monthly production schedule and a monthly summary of cash payments for January through June. Volt produced 1,100 units in December.

Short answer

Production schedule

	January	February	March	April	May	June
Forecasted unit sales	1,300	1,150	1,100	1,600	1,850	2,000
Add: Desired ending inventory	1,265	1,210	1,760	2,035	2,200	1,870
Less: Beginning inventory	1,430	1,265	1,210	1,760	2,035	2,200
Units to be produced	1,135	1,095	1,650	1,875	2,015	1,670

Summary of cash payments

	December	January	February	March	April	May	June
Units produced	1,100	1,135	1,095	1,650	1,875	2,015	1,670
Material cost paid month after production @($14 per unit)		15,400	15,890	15,330	23,100	26,250	28,210
Labor cost @7 per unit		7,945	7,665	11,550	13,125	14,105	11,690
Fixed overheads		8,500	8,500	8,500	8,500	8,500	8,500
Interest				8,500
Employee bonus							13,700
Total cash payment		31,845	32,055	43,880	44,725	48,855	62,100

Step-by-step solution

Desired ending inventory of January

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\mathrm{of}\mathrm{january}& =& 110\%\mathrm{of}\mathrm{next}\mathrm{month}\mathrm{expected}\mathrm{sales}\\ & =& 110\%\times \$1,150\\ & =& \$1,265\end{array}$

Desired ending inventory of February

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\mathrm{of}\mathrm{february}& =& 110\%\mathrm{of}\mathrm{next}\mathrm{month}\mathrm{expected}\mathrm{sales}\\ & =& 110\%\times \$1,100\\ & =& \$1,210\end{array}$

Desired ending inventory of March

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\mathrm{of}\mathrm{march}& =& 110\%\mathrm{of}\mathrm{next}\mathrm{month}\mathrm{expected}\mathrm{sales}\\ & =& 110\%\times \$1,600\\ & =& \$1,760\end{array}$

Desired ending inventory of April

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\mathrm{of}\mathrm{april}& =& 110\%\mathrm{of}\mathrm{next}\mathrm{month}\mathrm{expected}\mathrm{sales}\\ & =& 110\%\times \$1,850\\ & =& \$2,035\end{array}$

Desired ending inventory of May

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\mathrm{of}\mathrm{may}& =& 110\%\mathrm{of}\mathrm{next}\mathrm{month}\mathrm{expected}\mathrm{sales}\\ & =& 110\%\times \$2,000\\ & =& \$2,200\end{array}$

Desired ending inventory of June

$\begin{array}{rcl}\mathrm{Ending}\mathrm{inventory}\mathrm{of}\mathrm{june}& =& 110\%\mathrm{of}\mathrm{next}\mathrm{month}\mathrm{expected}\mathrm{sales}\\ & =& 110\%\times \$1,700\\ & =& \$1,870\end{array}$

Beginning inventory of January

$\begin{array}{rcl}\mathrm{Beginning}\mathrm{inventory}\mathrm{of}\mathrm{january}& =& 110\%\mathrm{of}\mathrm{january}\mathrm{expected}\mathrm{sales}\\ & =& 110\%\times \$1,300\\ & =& \$1,430\end{array}$