Question

Williams Company budgets sales of 880 units in May and 960 units in June. The April 30 ending finished goods inventory is 220 units. If each month’s ending inventory should be 25% of the next month’s sales, the company will produce 860 units in May.

A. TRUE
B. FALSE

Answer 1

The company needs to produce 900 units in May, not 860, because the desired ending inventory for May is 240 units, which when added to the May sales forecast and subtracting the beginning inventory, results in 900 units. Therefore, the statement is FALSE.

Step-by-step explanation:

Let's assess the statement that Williams Company will produce 860 units in May:

• April 30 ending inventory: 220 units
• May sales forecast: 880 units
• June sales forecast: 960 units

The desired ending inventory for May would be 25% of June's sales forecast, so:

End of May inventory = 25% of 960 = 0.25 × 960 = 240 units

To calculate the production for May, we need to add the desired end inventory to the sales forecast, then subtract the beginning inventory:

Production in May = May sales + End of May inventory - April 30 ending inventory

Production in May = 880 units + 240 units - 220 units = 900 units

Since the company needs to produce 900 units, not 860, the statement is FALSE.