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Antonio Banderos & Scarves make headwear that is very popular in the fall-winter season. Units...

Question:

Antonio Banderos & Scarves make headwear that is very popular in the fall-winter season. Units sold are anticipated as follows:

October 1,250
November 2,250
December 4,500
January 3,500
Total 11,500 units

If seasonal production is used, it is assumed that inventory will directly match sates for each month and there will be no inventory buildup. However, Antonio decides to go with level production to avoid being out of merchandise. He will produce the 11,500 items over four months at a level of 2,875 per month.

A. What is the ending inventory at the end of each month? Compare the unit sales to the units produced and keep a running total.

B. If the inventory costs $8 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing costs and the total for the four months?

Financing Cost:

Financing cost refers to the interest expense that an entity needs to incur on the funds borrowed by it from the market. It is the consideration that needs to be paid to the lender for using the money.

Answer and Explanation:

A. Computation of ending inventory at the end of each month

Particular October November December January
Opening Balance of Inventory Nil 1,625 2,250 625
Production 2,875 2,875 2,875 2,875
Sold during the month 1,250 2,250 4,500 3,500
Closing balance of inventory 1,625 2,250 625 Nil

B. Computation of monthly financing cost and total for the four month.

{eq}\begin{align*} {\text{Monthly Financing Cost}} &= {\text{Monthly Production}} \times {\text{Rate Per Unit}} \times {\text{Financing Cost}}\\ &= 2,875 \times \$ 8 \times 12\% \\ &= \$ 2,760 \end{align*} {/eq}

{eq}\begin{align*} {\text{Total Financial Cost}} &= {\text{Monthly Financing Cost}} \times {\text{Number of Months}}\\ &= \$ 2,760 \times 4\,{\text{months}}\\ &= \$ 11,040 \end{align*} {/eq}


Learn more about this topic:

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What Is Financing? - Definition & Types

from Corporate Finance: Help & Review

Chapter 8 / Lesson 7
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