Question

Antonio Banderos & Scarves make headwear that is very popular in the fall-winter season. Units sold are anticipated as follows:

October	1,250
November	2,250
December	4,500
January	3,500
Total units	11,500

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory build-up.

However, Antonio decides to go with level production to avoid being out of merchandise. He will produce the 11,500 items over four months at a level of 2,875 per month.

a. What is the ending inventory at the end of each month? Compare the units sales to the units produced and keep a running total.

b. If the inventory costs $8 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 1 percent or the monthly rate.)

Short answer

The ending inventory at the end of October is 1,625 units, November is 2,250 units, December is 625 units, and January is 0 units. The total cost of financing is $360.

Step-by-step solution

 Calculation of ending inventory at the end of each month

Month	Units sold	Units produced	Change in inventory	Ending inventory
October	1,250	2,875	1,625	1,625
November	2,250	2,875	625	2,250
December	4,500	2,875	(1,625)	625
January	3,500	2,875	(625)	0

Expected sales for next year

Month	Ending inventory	Total cost per unit ($8 per unit)	Inventory financing cost (at 1% per month)
October	1,650	13,000	130
November	2,250	18,000	180
December	625	5,000	50
January	0	0	0

The total financing cost is $360.