Bengal Co. provides the following sales forecast for the next three months:

Sales units

July 5,000

August 5,700

September 5,560

The company wants to end each month with ending finished goods inventory equal to 25% of the next month's sales. Finished goods inventory on June 30 is 1,250 units.

The budgeted production units for August are:

a) 3,750 units. b) 6,425 units. c) 2,500 units. d) 5,175 units. e) 6,250 units.

None of the options from A to D has the correct answer.

The correct answer is:

5,665 units

Explanation:

To calculate the budgeted production units for August, we will first of all calculate the ending inventory unit balance from July, which is the same as beginning inventory for August, and that is shown thus:

ending finished good inventory = 25% of the next month's sales.

∴ ending finished goods inventory for July = 25% of 5,700

= 25/100 * 5,700 = 0.25 * 5,700 = 1,425 units

Next, let us calculate the projected ending finished goods inventory for August, as shown below:

August ending inventory = 25% of September's sale

= 0.25 * 5,560 = 1,390 units.

Units to be produced in August is calculated thus:

Total units required in August = sales + ending inventory

= 5,700 + 1,390 = 7,090 units

Remember that we had a beginning inventory for August of 1,425 units from July's ending balance. Therefore, out of the total units required in August, 1,425 units is already available, hence the units to be produced is calculated as:

Production units in August = Total units required in August - Beginning inventory

= 7,090 - 1,425 = $5,665