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?

a. It will increase
b. It will decrease
c. It will stay the same
d. It will be twice the size of the desired ending inventory of raw materials
e. None of these

Answer 1

With a 50% expected increase in sales, the desired ending inventory of finished product will increase if the company maintains its current policy for inventory proportions. Option a.

Step-by-step explanation:

If a company has had stable sales and production but is expecting sales to increase by at least 50% in the next year, and it maintains its policy for desired ending inventories of finished product and direct materials purchases, the likely effect will be that the desired ending inventory of finished product will increase.

This is because desired ending inventories are often set as a proportion of future sales; therefore, with an increase in sales, the amount of finished product that the company wants to have at the end of the period would also increase to meet anticipated customer demand or to maintain their policy for desired inventory levels.

So Option a is correct.