Sales Quantity Calculation

[turabamin]

1. Production per year: 350 days
2. Production capacity @100% : 1000 Units
3. Capacity utilization in 2017: 90% and in 2018: 92%
4. Work in progress days: 2 days
5. Finished goods inventory: 10 days

Assuming except WIP and finished goods inventory, all of the production will be sold, what would be sales quantity in 2017 and 2018?

 

[Becky]

Is this a study question?

Please note that if you are looking for assistance with an exam-style question, you must attempt the question yourself before asking for help. You can then state the answer you have so far and explain which aspect you need help with. Anyone posting exam-style questions expecting the answer to be given to them will have their posts removed. Repeat offenders will be banned from the forum.

 

[turabamin]

Is this a study question?

No, the question i have asked here is from my financial modeling works. The issue here is that some ppl in my office use (350-2)= 348 days to calculate closing finished goods inventory while some other use 350 days for the same. I am a bit confused here and so i asked the question.

 

[Steve-LevelUp]

It might be easier for you to post your model here and we can look at the formulas that you have populated. If you ignore WIP and FG and just calculate based on utilization, then you can work back from that.

 

[turabamin]

It might be easier for you to post your model here and we can look at the formulas that you have populated. If you ignore WIP and FG and just calculate based on utilization, then you can work back from that.

There are two groups in my office, who calculate the answers of the problem in two different ways.

First way (for first year)

Production for 350 days: 900 Units
Closing WIP for 2 days: 5.143 Units =[2*(900/350)]
Total finished goods production: 894.86 units=(900-5.143)
Closing finished goods inventory for 10 days: 25.567 units=[10*(894.86/350)]
Sales quantity for first year: 869.293 units =(894.86-25.567)

Second way ( for first year)

Production for 350 days: 900 Units
Closing WIP for 2 days: 5.143 Units =[2*(900/350)]
Total finished goods production: 894.86 units=(900-5.143)
Closing finished goods inventory for 10 days: 25.714 units=[10*(894.86/348)]
Sales quantity for first year: 869.146 units =(894.86-25.714)

Now my question is which way is correct?

 

[Steve-LevelUp]

So, two questions.

Are you able to sell a fraction of a unit?

What does your sales report tell you that you sold? Eg, look at the 2017 sales and the compare to see which one is correct.

 

[turabamin]

So, two questions.

Are you able to sell a fraction of a unit?

What does your sales report tell you that you sold? Eg, look at the 2017 sales and the compare to see which one is correct.

Answer 1: for the simplicity of calculation we assume that we can

Answer 2: Forgot to mention that this is for a financial modeling which is completely based on projection. Though I mentioned 2017 as first year, kindly consider that this would happen in future. Actually this is a past model which has some miscalculation and I am working on to correct them

 

[Steve-LevelUp]

Well, going of simplicity, given both give the same number, then either would work.

As for financial modelling, you did mention that it was for 2017 and 2018. Given 2017 is over, you can compare your model to actual to determine if it was correct. the point of a model is for it to accurately predict actuals. So, get the 2017 actuals and build a model that replicates the actual real sales.

 

[turabamin]

Well, going of simplicity, given both give the same number, then either would work.

As for financial modelling, you did mention that it was for 2017 and 2018. Given 2017 is over, you can compare your model to actual to determine if it was correct. the point of a model is for it to accurately predict actuals. So, get the 2017 actuals and build a model that replicates the actual real sales.

Sales figures are in million. So i think figures after decimal matter. can you just tell which of the two ways is correct? for finished goods inventory calculation, should the divisor be 350 or 348?

Since it is a financial model, end users only care about NPV, IRR and PBP results. And this model was built in 2016 and now it is being updated. Initially starting year of the model was 2017 but management has decided to start the business in 2020. So previous starting year 2017 will be replaced with 2020.

Thanks a lot for your time.

 

[Steve-LevelUp]

I would use 350 days.