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

Unit Sales Forecast for December 2009 = $2,500,000/$2.5

1 million units

Safety stock required = 15% of December sales = 150,000 units

Beginning Inventory (October 2009) = 120,000 units

Production needed in October = Dec. ‘09 Sales + Safety Stock –     Beg. Inventory

Production needed in October = 1,000,000 + 150,000 –     120,000=970,000 units

Cost of Production (Oct. 2009) = 970,000*$1.50= $1,455,000

Labor cost = .60*$1,455,000 = $873,000 èpaid in October 2009

Shipping cost = .10*$1,455,000 = $145,500 èpaid in November 2009

Material cost = .30*$1,455,000 = $436,500 èpaid in September 2009

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