Waterloo, Ltd. manufactures a component used in aircraft navigation systems. Dem

Question

Waterloo, Ltd. manufactures a component used in aircraft navigation systems. Demand has been strong and the executive staff at Waterloo is planning for next year. Yesterday, you were called into a budgeting meeting where production plans are being reviewed. You learn that the inventory policy at Waterloo is to hold one and one-half months’ worth of sales (to avoid issues with transportation disruptions). The sales budget for next year is 680,000 units, spread evenly over the year. Because of an unexpected increase in demand, inventory at the end of this year is expected to be only 50,000 units. The capacity of the plant is 720,000 units annually. Required: a. What production level next year will be required to meet the targets?

Explanation / Answer

Desired Ending Inventory = (680,000 / 12 months) x 1.5 months

.........................................= 85,000 units

Total sale = 680,000 units

Beginning Inventory = 50,000 units

Next Year's Production = 680,000 - 50,000 + 85,000

......................................= 715,000 units

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