Question

Estimate Inventory Levels Using Production Budgets (LO 13-3) Benham Foundries manufactures metal components. The inventory policy at Benham is to hold inventory equal to 154 percent of the average monthly sales for its main product. Sales for the main product for the following year are expected to be 504,000 units. Based on the inventory policy, the budget calls for the production of 474,000 units. What is the beginning inventory of the main product?

Answer 1

The beginning inventory for Benham Foundries, following their inventory policy of holding inventory at 154 percent of average monthly sales, is estimated to be 94,680 units. This is determined by calculating the desired inventory level based on projected sales and adjusting for the production units planned in the budget.

Step-by-step explanation:

To estimate the beginning inventory for Benham Foundries:

we can use the information that the inventory policy is to hold inventory equal to 154 percent of the average monthly sales. Given that the annual sales are expected to be 504,000 units, we first calculate the average monthly sales by dividing the annual sales by 12 months, resulting in an average monthly sales figure of 42,000 units. Since the budget calls for the production of 474,000 units, we can infer that the starting inventory plus the production minus the sales should equal the target ending inventory (which is the same as the starting inventory due to a steady-state assumption).

Hence, using the formula Beginning Inventory + Production - Sales = Beginning Inventory, we solve for the beginning inventory: Beginning Inventory = Sales + Ending Inventory - Production. By substituting the known values, we get Beginning Inventory = 504,000 units + 64,680 units - 474,000 units, which equals 94,680 units.