Question

A company has had stable sales and production for several years. Next year, sales are expected to increase by at least 50%. Assuming that the company maintains its policy for desired ending inventories of finished product and direct materials purchases, what will be the likely effect on the desired ending inventory of finished product?

Answer 1

Company will increase its ending inventory by 50%.

Step-by-step explanation:

Since years the sales level have been same, now it is expected that sales will increase at-least by 50%.

Also it is provided the company maintains the closing stock of finished goods and direct material purchases. Thus, now the company is expecting and sure for 50% rise in sales, therefore, the company shall buy and produce extra units.

Net impact will be that the company will increase its closing inventory or the company will fall short of inventory, that too by 50% of the demand for sale.

Thus the company shall maintain, 50% more inventory.