A small textile company expects monthly sales (units) for the next 6 months as follows: Jan – 3,000, Feb – 3,500, Mar – 3,200, Apr – 3,800, May – 4,000, Jun – 4,200. The desired ending inventory at the end of June is 500 units and the beginning inventory on Jan 1 is 300 units. The selling price per unit is Rs.200, the variable cost per unit is Rs.120, and the fixed manufacturing overhead for June is Rs.500,000. Prepare the production budget for June (in units) and compute the expected profit for June.
Answer
Production required: 4,400 units; Expected profit: Rs.–188,000
The correct answer is Production required: 4,400 units; Expected profit: Rs.–188,000 — Determine profit: Rs.840,000 – Rs.1,028,000 = Rs.–188,000 (a loss).
Step-by-step solution
- Determine production requirement: 4,200 sales + 500 desired ending inventory – 300 beginning inventory = 4,400 units.
- Calculate variable cost: 4,400 units × Rs.120 = Rs.528,000.
- Add fixed overhead: Rs.528,000 + Rs.500,000 = Rs.1,028,000. This is total cost for June.
- Compute revenue: 4,200 units × Rs.200 = Rs.840,000.
- Determine profit: Rs.840,000 – Rs.1,028,000 = Rs.–188,000 (a loss).
Common mistake: Forgetting to adjust for inventory changes in production calculation
Concept tested: Production budgeting with inventory effects
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