Buckeye Inc. uses the sales forecast to plan production. The company produces a glow-in-the-dark cup called "Lights-Out" one month in advance of the forecasted sale
The January sales forecast of 20 units of these cups will be scheduled for December production. However, the company also notes that sales forecasts and actual sales can differ, and the company has a policy of having 20% in inventory to accommodate sales above forecast. Raw materials for Lights-Out are acquired the month ahead (in this case, November). Wages are paid in the current month of production (December). Utilities are paid a month after production (January) and shipping is paid a month after the sale (two months after production, February). Finally, an inventory count reveals that there are currently 4 units on hand above the projected sales for November (at the start of November when the raw material order is placed). Unit production costs are $40 for raw materials, $20 for wages, $10 for utilities, and $5 for shipping. Determine the amounts of cash outflows for December's production.
A) Raw material of $800 paid in November, Wages of $400 paid in December, Utilities of $200 paid in January, Shipping of $100 paid in February
B) Raw material of $800 paid in November, Wages of $400 paid in December, Utilities of $100 paid in January, Shipping of $100 paid in February
C) Raw material of $800 paid in November, Wages of $400 paid in December, Utilities of $200 paid in January, Shipping of $200 paid in February
D) Raw material of $400 paid in November, Wages of $800 paid in December, Utilities of $200 paid in January, Shipping of $100 paid in February
Answer: A
Explanation: A) If the January sales forecast is for 20 units and management has a 20% safety level of stock, then it wants 20 + 4 or 24 units in inventory at the start of January. If the beginning inventory is 4 units, then the December production schedule is for - = . Now we can determine the cash outflows for December production.
Raw materials: 20 × $40 = $800 paid in November.
Wages: 20 × $20 = $400 paid in December
Utilities: 20 × $10 = $200 paid in January
Shipping: 20 × $5 = $100 paid in February
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