CASE 6-1: PREPARE A PRODUCTION PLAN: WHAT PROBLEMS ARRIVE? Midwest Plastics Company has conducted profit planning for several years. The president stated (with justification) that inventory control and planning had not been satisfactory, which was mainly due to poor planning of production and inventory budgets. Please analyze and provide recommendations, in detail, on the issue regarding the 20B profit plan, which is now being prepared. Their analysis and recommendations will be presented to the executive committee. Despite the seasonality factor, the sales department has been successful in developing a sales plan, on a monthly basis, for each year. The following sales data is available for 20B. 1. Sales plan summary for 20B: 2. Finished goods inventory, as of January 1, 20B, is 96,000 units. 3. Work-in-process inventory will remain constant. 4. Actual annual sales in 20A, including the estimate for December, were 350,000 units. 5. The average finished goods inventory during 20A was 70,000 units. IT IS REQUESTED. 1. Prepare the annual production budget, assuming that management policy is to budget ending finished goods inventory at a standard quantity, based on the ratio of historical sales of 20A to inventory turnover. 2. Prepare a schedule showing sales, production, and inventory levels for each month, assuming: 1) stable inventory, 2) stable production, and 3) recommended inventory-production levels. In developing your recommendations, assume that the following policies have been established: a) The president has set the policy that a maximum inventory of 85,000 units and a minimum inventory of 75,000 units should be used, except in abnormal circumstances. b) A stable level of production is definitely preferred, except that during the holiday season in July and August, production may be reduced by 25 percent. Likewise, a variation in production of 7.5 percent above and below the average level is acceptable. 3. What are the main problems faced by the company in production planning? Make your general recommendations.

Midwest Plastics Company is facing challenges in production planning and inventory control, which have led to unsatisfactory results in previous profit plans. Let's address the issues and provide recommendations: **1. Annual Production Budget:** The company's management policy is to budget ending finished goods inventory at a standard quantity based on the ratio of historical sales in 20A to inventory turnover. This will ensure that inventory control is closely tied to historical sales trends. The formula for calculating the annual production target is: Annual Production Target = (Historical Sales / Average Inventory Turnover) Given data: - Historical Sales (20A) = 350,000 units - Beginning Inventory (January 1, 20B) = 96,000 units - Average Finished Goods Inventory during 20A = 70,000 units Average Inventory Turnover = (Beginning Inventory + Ending Inventory) / 2 Average Inventory Turnover = (96,000 + 70,000) / 2 = 83,000 units Annual Production Target = 350,000 / 83,000 ≈ 4.22 (rounded to the nearest whole unit) So, the annual production budget for 20B is approximately 4,220,000 units. **2. Sales, Production, and Inventory Schedule:** a) **Stable Inventory:** - Begin with the given January 1, 20B inventory of 96,000 units. - Calculate the monthly production required to maintain a stable inventory level between the maximum (85,000 units) and minimum (75,000 units) levels. Adjust production based on sales and inventory targets. b) **Stable Production:** - Calculate the average monthly production level based on the annual production budget (4,220,000 / 12 months). - During the holiday season in July and August, reduce production by 25 percent. - Adjust production for other months to meet the sales target while maintaining the desired inventory levels. c) **Recommended Inventory-Production Levels:** - Maintain a stable production level but adjust inventory to meet the recommended levels (75,000 to 85,000 units) based on company policy. - Calculate the monthly production and sales to achieve this balance. **3. Main Problems in Production Planning:** a) Poor planning of production and inventory budgets. b) Insufficient consideration of seasonality in production planning. c) Inventory turnover not optimized. **General Recommendations:** a) Implement more accurate and dynamic production and inventory budgeting procedures that take into account historical sales data and inventory turnover ratios. b) Develop a robust seasonality plan, especially for the holiday season in July and August, by adjusting production levels. c) Continuously monitor and optimize inventory turnover within the recommended range of 75,000 to 85,000 units to minimize holding costs and maintain customer service levels. By following these recommendations and creating detailed monthly plans based on the scenarios outlined above, the company can better manage its production and inventory, improve profitability, and meet its targets. Regular review and adjustment of plans based on actual performance are essential for ongoing success in production planning.