FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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**Johnson Inc. Leather Inventory Management Problem**

Johnson Inc. produces leather handbags. The company estimates it will use 4,100 square meters of leather in production in August and 4,500 square meters of leather in production in September. Johnson Inc.'s leather inventory policy is to maintain 40% of the next month’s production needs in inventory. Based on this policy, what will leather purchases be in August?

**Options:**

- 5,900 square meters
- 4,100 square meters
- 3,940 square meters
- 4,260 square meters

**Analyzing the Problem:**

To determine the leather purchases for August, calculate the required ending inventory for August, which should cover 40% of September's production needs:

September's production needs = 4,500 square meters  
Ending inventory for August = 40% of 4,500 = 1,800 square meters

The total leather needed for August includes both the production needs for August and this ending inventory:

August production needs = 4,100 square meters

Total leather required in August = August production needs + Ending inventory for August  
= 4,100 + 1,800 = 5,900 square meters

Therefore, Johnson Inc. should purchase **5,900 square meters** of leather in August.
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Transcribed Image Text:**Johnson Inc. Leather Inventory Management Problem** Johnson Inc. produces leather handbags. The company estimates it will use 4,100 square meters of leather in production in August and 4,500 square meters of leather in production in September. Johnson Inc.'s leather inventory policy is to maintain 40% of the next month’s production needs in inventory. Based on this policy, what will leather purchases be in August? **Options:** - 5,900 square meters - 4,100 square meters - 3,940 square meters - 4,260 square meters **Analyzing the Problem:** To determine the leather purchases for August, calculate the required ending inventory for August, which should cover 40% of September's production needs: September's production needs = 4,500 square meters Ending inventory for August = 40% of 4,500 = 1,800 square meters The total leather needed for August includes both the production needs for August and this ending inventory: August production needs = 4,100 square meters Total leather required in August = August production needs + Ending inventory for August = 4,100 + 1,800 = 5,900 square meters Therefore, Johnson Inc. should purchase **5,900 square meters** of leather in August.
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