Bandamere Lighting Inc. uses the sales forecast to plan production. Th

Bandamere Lighting Inc. uses the sales forecast to plan production. The company produces the magnetic light bulb called “Bright-1” one month in advance of the forecasted sale.

The January sales forecast of 38 units of these bulbs will be scheduled for December production. However, the company also notes that sales forecasts and actual sales can differ, and the company has precisely calculated that it needs about 18.42% in inventory to accommodate sales above forecast. Raw materials for Bright-1 are acquired the month ahead (in this case, November). Wages are paid in the current month of production (December). Utilities are paid a month after production (January), and shipping is paid a month after the sale (two months after production, February). Finally, an inventory count reveals that there are currently 3 units on hand above the projected sales for November (at the start of November when the raw material order is placed). Unit production costs are $50 for raw materials, $30 for wages, $20 for utilities, and $10 for shipping. Determine the cash outflows for December’s production.
A) Raw material of $1,900 paid in November, Wages of $1,140 paid in December, Utilities of $380 paid in January, Shipping of $760 paid in February
B) Raw material of $1,900 paid in November, Wages of $1,000 paid in December, Utilities of $760 paid in January, Shipping of $380 paid in February
C) Raw material of $1,200 paid in November, Wages of $1,140 paid in December, Utilities of $760 paid in January, Shipping of $380 paid in February
D) Raw material of $2,100 paid in November, Wages of $1,260 paid in December, Utilities of $840 paid in January, Shipping of $420 paid in February

ANSWER

Answer: D
Explanation: D) If the January sales forecast is for 38 units and management has an 18.42% safety level of stock, then it wants about 38 + 7, or 45 units in inventory at the start of January. If the beginning inventory is 3 units, then the December production schedule is for – = . Now we can determine the cash outflows for December’s production.
Raw materials: 42 × $50 = $2,100 paid in November.
Wages: 42 × $30 = $1,260 paid in December
Utilities: 42 × $20 = $840 paid in January
Shipping: 42 × $10 = $420 paid in February