The Creative Products Corporation produces its products two months in advance of

Question

The Creative Products Corporation produces its products two months in advance of anticipated sales and ships to warehouse centers the month before sale. The inventory safety stock is 15% of the anticipated month’s sale. Beginning inventory in October 2009 was 120,000 units. Each unit costs $1.50 to make. The average selling price is $2.50 per unit. The cost is made up of 60% labor, 30% materials, and 10% shipping (to warehouse). Labor is paid the month of production, shipping the month after production, and raw materials the month prior to production. What is the production cash outflow for the month of October 2009 production, and in what months does it occur? Assume that the sales forecast for December 2009 is $2,500,000.

Explanation / Answer

DETAILS TOTAL SALES IN DECEMBER IN UNITS ($2500000 / $2.50) 1000000 BEGINNING INVENTORY IN OCTOBER 2009 (120000) TOTAL PRODUCTION TO BE MADE IN OCTOBER 880000 TOTAL PRODUCTION COST (880000 * $1.50) $1320000 CASH OUT FLOW MONTH OF SEPTEMBER FOR MATERIAL ($1320000 * 30%) $396000 CASH OUT FLOW MONTH OF OCTOBER FOR LABOUR ($1320000 * 60%) $792000 CASH OUT FLOW MONTH OF NOVEMBER FOR SHIPPING ($1320000 * 10%) $132000

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