EXERCISE 7-9 (20 MINUTES)

1. Because of soft demand for the Brazilian Division’s product, the inven-

tory should be drawn down to the minimum level of 50 units. Drawing

inventory down to the minimum level would require production as fol-

lows during the last quarter:

Desired inventory, December 31 ... 50 units

Expected sales, last quarter ... 600 units

Total needs... 650 units

Less inventory, September 30... 400 units

Required production ... 250 units

Drawing inventory down to the minimum level would save inventory car-

rying costs such as storage (rent, insurance), interest, and obsoles-

cence.

The number of units scheduled for production will not affect the re-

ported net operating income or loss for the year if variable costing is in

use. All fixed manufacturing overhead cost will be treated as an expense

of the period regardless of the number of units produced. Thus, no fixed

manufacturing overhead cost will be shifted between periods through

the inventory account and income will be a function of the number of

units sold, rather than a function of the number of units produced.