Chapter 11, Problem 28P

a

Summary Introduction

Interpretation: Ending inventory at the end of month 4 is to be calculated.

Concept Introduction: Holding cost or inventory cost is the cost of warehousing in which unsold goods are kept. It includes transportation, warehousing, insurance etc.

Explanation of Solution

Demand of the product for 5 months is given as 200,50,200,200 and 150 respectively. Beginning inventory is 50 units and the company planned to produce 150 units per month for 5 months.

Calculation of inventories for next 5 months:

Month	1	2	3	4	5
Demand	200	50	200	200	150
Production	150	150	150	150	150
Inventory on hand (50)	0	100	50	0	0

The demand for the product is given and it is stated that units are planned for production for months. The beginning inventory is 50 units.

Calculation of ending inventory for month 1:

Ending inventory is calculated by adding beginning inventory and production. Then, subtract the attained value with demand of the product.

  $\text{Ending}\text{inventory}\text{=}\text{Beginning}\text{inventory}\text{+}\text{Production}\text{-}\text{Demand}$

  $\text{Ending}\text{inventory}\text{=}\text{50}\text{units}\text{+}\text{150}\text{units}\text{-}\text{200}\text{units}$

  $\text{Ending}\text{inventory}\text{=}\text{0}\text{units}$

Hence, the ending inventory for the product is 0 units.

Hence, the same continues for all the months.

Calculation of ending inventory of month 4:

Ending inventory is calculated by adding beginning inventory and production. Then, subtract the attained value with the demand of the product.

  $\text{Ending}\text{inventory}\text{=}\text{Beginning}\text{inventory}\text{+}\text{Production}\text{-}\text{Demand}$

  $\text{Ending}\text{inventory}\text{=}\text{50}\text{units}\text{+}\text{150}\text{units}\text{-}\text{200}\text{units}$

  $\text{Ending}\text{inventory}\text{=}\text{0}\text{units}$

Hence, the ending inventory for the product is 0 units.

b

Summary Introduction

Interpretation: Average inventory during the month of 2 is to be calculated.

Concept Introduction: Holding cost or inventory cost is the cost of warehousing in which unsold goods are kept. It includes transportation, warehousing, insurance etc.

Explanation of Solution

Calculation of average inventory during month 2:

Average inventory is calculated by taking the average of beginning and ending inventory of the certain period.

  $\text{Average}\text{inventory}\text{=}\frac{\text{Beginning}\text{inventory+}\text{Ending}\text{inventory}}{\text{2}}$

  $\text{Average}\text{inventory}\text{=}\frac{\text{0+}100}{\text{2}}$

  $\text{Average}\text{inventory}\text{=}\text{50}\text{units}$

Hence, the average inventory for month 2 is 50 units.

c

Summary Introduction

Interpretation: Total inventory holding cost is to be calculated.

Concept Introduction: Holding cost or inventory cost is the cost of warehousing in which unsold goods are kept. It includes transportation, warehousing, insurance etc.

Explanation of Solution

Calculation of inventory holding cost:

It is given that the inventory holding cost per units is $0.50. Total inventory holding cost is calculated by multiplying the holding cost per unit with the sum of stock on hand over 5 months.

  $\begin{array}{l}\text{Inventory}\text{holdingcost=}\text{Sum}\text{of}\text{inventory}\text{on}\text{hand×}\text{Holding}\text{cost}\text{per}\text{unit}\\ \text{=}\text{(0+100+50+0+0)×}\text{\$0}\text{.50}\\ \text{=}\text{\$75}\end{array}$

Hence, the total inventory holding cost is $75.