Porcelain Interiors sells a variety of porcelain products including porcelain sinks. At December 31, the company had 200 sinks in inventory. The company's policy is to maintain a sink inventory equal to 5% of next month's sales. The company expects the following sales activity for the first quarter of the year:January 1,500 sinks
February 2,000 sinks
March 2,300 sinks
What is the projected production for February?
A) 2,115
B) 2,015
C) 1,985
D) 2,215

The correct answer is B.

Explanation:

Giving the following information:

The company's policy is to maintain a sink inventory equal to 5% of next month's sales.

Sales:

February 2,000 sinks

March 2,300 sinks

To determine the number of sinks to be produced in February, we need to use the following formula:

Production= sales + desired ending inventory - beginning inventory

Production Budget February:

Sales= 2,000 sinks

Ending inventory= 2,300*0.05= 115

Beginning inventory= 2,000*0.05= (100)

Total= 2,015 sinks

The projected production for February is B) 2015 sinks

Explanation:

The projected production for any month will include an opening inventory that is expected to be equal to 5% of that month's sale plus production for that month's remaining sales and production of units equal to 5% of net month's sales.

The expected opening inventory for February under this assumption is 2000*5% = 100 sinks.

Out of the sales of 2000 for February, 100 will be covered by opening inventory. The remaining sales are 2000 - 100 = 1900

Thus, the production requirement for February will include production requirement for February's sales = 2000 - 100 = 1900

plus the production requirement equal to 5% of march sales = 2300 * 5% = 115

Production in February = 1900 + 115 = 2015 sinks