The following table presents Generic Motors Company\'s production budget. GM\'s

Question

The following table presents Generic Motors Company's production budget. GM's inventory policy is to have ending inventory equal to20% of next month's sales.

Required:
(a) Fill in the missing numbers in the table above.
(Hint if you get stuck: What is the relation between ending inventory for one month and beginning inventory for the following month?)

b) Why do firms want to hold inventory of finished goods? (an alternative could be to produce exactly the amount they are going to sell, and hold zero inventories)

February March April Ending inventory 5,000 Beginning inventory 2,000 Budgeted sales 13,000 17,000 18,000 Budgeted production

Explanation / Answer

a) February March April Ending inventory 20% 0f 17000 = 3400 20% of 18000 = 3600 5,000 Beginning inventory 2,000 3400 3600 Budgeted sales 13,000 17,000 18,000 Budgeted production 14400 16200 19400 ending inventory of previous month = begining inventory of next month budgeted production = budgeted sales - begining inventory + ending inventory b) as they dont know exactly how much goods to be produced. based on expectations they produce more . so they remain as inventory

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