[irelandcw]

Hi Guys,

Could anyone tell me why the beginning inventory is being ignored in this question? I really don’t understand the logic in reaching the correct answer (D):

Daffy Tunes manufactures an animated rabbit with moving parts and a built-in voice box. Projected sales in units are as follows.

Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are purchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit and variable overhead cost is $.50 per rabbit. Fixed manufacturing overhead applicable to rabbit production is $12,000 per month.

Daffy’s policy is to manufacture 1.5 times the coming month’s projected sales every other month starting with January (i.e., odd-numbered months) for February sales, and to manufacture 0.5 times the coming month’s projected sales in alternate months (i.e., even-numbered months). This allows Daffy to allocate limited manufacturing resources to other products as needed during the even-numbered months.

The dollar production budget for animated rabbits for February is

$327,000.

$113,500.

$390,000.

$127,500.

[Anonymous]

I think we're missing some of the info from the question, specifically the projected sales for each month, so I can't tell you how they reach their answer. However, if your specific question is “Why don't you count the beginning inventory?”, I can answer that.

The questions says: “Daffy's policy is…to manufacture 0.5 times the coming month's projected sales in alternate months”. It doesn't say “To have in inventory 0.5 times the coming month's projected sales by March 1”, it says “To *manufacture* 0.5 times the coming month's projected sales”. If they wanted to have a certain amount in inventory by the end of the month – we'll say 500,000 units – then they would need to know beginning inventory to see how many they need to make. However, it sounds like their expectation is that 0.5 of expected February sales will still be in inventory from January, so their goal is that 0.5 of expected March sales added to that during February will mean at the end of February, you've got close to 1.0 of expected March sales.

Let me create some expected sales figures to illustrate better….

February expected: 100,000

March expected: 110,000

If January production was done correctly, then on Feb 1, there'd be 150,000 units in inventory. Expectation is that 100,000 of these will sell during February, leaving 50,000. February production is 0.5 of expected March, or 55,000. If they count in beginning inventory of 150,000 units, they won't make any in February, and they'll start out March with just half of what they're supposed to have for March. If they count instead what's expected to remain of February inventory (50,000), then they might make 5,000 units.

However, if they manufacture 0.5 of the March units, then they'll manufacture 55,000 during February. This would mean at Mar 1, they'd have 105,000 (50,000 + 55,000) units in inventory, which is awfully close to the 110,000 expected sales, and would give them a solid start-point to in March start working on the 1.5 of expected April sales.

[quittingcpa2013]

The dollar production budget is = total variable production costs + fixed costs

Variable production costs are are $3.50+$1.00+$2.00+$0.50= $7/unit

The question stipulates that in February (even-numbered month), it produce .5 times the coming month's projected sales (which would be the projected sales in March)

Assuming: I think you left out the the sales, but since you said the final answer is $127,500, I'll work backwards to get March expected sales (X). 127500-12000-(X * .5 * $7/unit). Solving for X = (127500-12000) / .5 / $7 = 33,000 March projected Sales.

33,000 * .5 = 16,500 units produced in February.

$115,500 variable production costs (16,500 units * $7/unit variable cost)

+$12,000 monthly fixed manufactured overhead

=$127,500

GL

[irelandcw]

Apologies!

Projected

Month Sales in Units

January 30,000

February 36,000

March 33,000

April 40,000

May 29,000

[Anonymous]

I am also confused with this questions.

If 0.5 of March needs to to be produced in Feb which 33,000 X 0.05 = 16,500 units.

But in January we produced Feb 1.05 sales which is 36,000 X 1.05 = 54,000 units

So in Feb we already had beg inventory of 54,000 units and our expected sales for Feb was 36,000 units and we need to produce add'l 16,500 units which totals 52,500.

So i don't understand why we are producing 16,500 units when we already have enough units produced in Feb to cover the requirement?

[Missy]

Don't overthink it CPAneed. Their policy is to MANUFACTURE .5 times the following months sales. Don't care if they have 65,000,000,000 units already sitting in inventory, they're still going to make 1/2 of the following months sales.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Anonymous]

lol thank you @mla11692

I think i was missing the keyword Manufacture rather than policy of having certain inv.

[Author]

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