Part 1  -  Determine the # of units or products to purchase each month

In order to determine the number of units to purchase each month, you are required to A) Forecast Your Monthly Sales in Units, and B) develop a Monthly Ending Inventory Schedule.

A.   FORECAST YOUR MONTHLY SALES IN UNITS
Your Monthly Forecasted Sales in Units represent the number of products you estimate to sell in each month, of each forecasted business year. You would have already forecasted these amounts in Budget 2 entitled "Developing Your Sales Budget". Recall from Budget 2, Murray estimated to sell the following number of diskettes (products) in each month during 200X and 200Y.

Forecasted Unit Sales per Month is the foundation of the Purchase Budget. The reason is rather simple - if you plan to sell 500 products to customers in January, for instance, then you will be required to purchase (or have in inventory) at least 500 products. Moreover, in July, 200X, Murray will have to purchase (or have in inventory) at least 720 "finished" diskettes, since he's forecasting to sell 720 diskettes. In August, 200X, Murray will have to purchase (or have in inventory) at least 920 "finished" diskettes, since he is forecasting to sell 920 diskettes to customers. And so on...

B.    MONTHLY ENDING INVENTORY SCHEDULE:
The second item needed to determine the number of units or products to be purchased each month is known as a Monthly Ending Inventory Schedule. The Monthly Ending Inventory Schedule determines the number of units (products) you will have in inventory at the end of each month.

As you might suspect, the Monthly Ending Inventory Schedule will vary from business to business. Some mail order businesses, for instance, may order their inventory at the end of any given month, while retailers generally purchase their inventory one, two, even three months in advance. Drop shippers, on the other hand, usually do not have to order or carry any inventory.

The timing of purchases and thus, the Ending Monthly Inventory Schedule, directly relate to your inventory control policies and to when you expect sales to materialize. Common Inventory Schedules include;

• • 100% of next month's forecasted unit sales
  • 90% of next month's forecasted unit sales
  • 80% of next month's forecasted unit sales
  • 70% of next month's forecasted unit sales
  • 60% of next month's forecasted unit sales
  • 50% of next month's forecasted unit sales
  • 40% of next month's forecasted unit sales
  • 30% of next month's forecasted unit sales
  • 20% of next month's forecasted unit sales
  • 10% of next month's forecasted unit sales
  • 5% of next month's forecasted unit sales

After considering the cost of maintaining an investment in inventory and the potential cost associated with a temporary inventory shortage, Murray has decided that the number of units in his inventory at the end of each month should equal "90% of next month's forecasted unit sales". In other words, the inventory at the end of August, should equal 90% of September's forecasted unit sales. And the inventory at the end of September should equal 90% of October's forecasted unit sales. And so on.

Since Murray has determined his monthly forecasted unit sales and has decided on his Monthly Ending Inventory, he can determine the number of units he must purchase each month (IE Purchase Budget). Below illustrates Murray's 200X Purchase Budget.

As you can see, in 200X Murray will purchase 1,548 units or diskettes from his supplier in July, 956 diskettes in August, 564 diskettes in September, 412 diskettes in October, 472 diskettes in November, and 912 diskettes in December.

The Forecasted Sales in Units each month are added to 90% of Next Months Forecasted Sales in units, to produce the Total Units Available. The Inventory in Units (at the beginning of each month) is then subtracted from the Total Units Available, to arrive at the Number of Units to be Purchased for the Month. In our example, Murray's Forecasted Sales in Units for July (720 units) is added to 90% of August's Forecasted Sales in Units (920 x 90% = 828 units), to produce the Total Units Available for Sale (720 + 828 = 1548 units). The Inventory in Units at the beginning of July (0 units) is then subtracted from the Total Units Available for Sale (1548 units), to produce the Number of Units Murray will purchase in July (1548 units).

Murray's Forecasted Sales in Units for August (920 units) is added to 90% of September's Forecasted Sales in Units (960 x 90% = 864 units), to produce the Total Units Available for Sale (920 + 864 = 1784 units). The Inventory of Units at the beginning of August (828 units) is then subtracted from the Total Units Available for Sale (1784 units), to produce the Number of Units Murray will purchase in August (956). And so on...

Notice, the last value appearing in the column entitled "Next Months Forecasted Sales" (960) . This value represents Murray's forecasted unit sales for January 200Y. Furthermore, Murray estimates 960 people will buy his diskette in January 200Y. January's forecasted sales in units is required here, since Murray's Ending Inventory level is based on "90% of the following month's forecasted unit sales". (IE the month following December 200X is January 200Y).

An important thing to remember when dealing with inventories is that the ending inventory of one month ALWAYS becomes the beginning inventory of the following month. In other words, July's ending inventory becomes August's beginning inventory, August's ending inventory becomes September's beginning inventory, September's ending inventory becomes October's beginning inventory, and so on. Also notice in the above chart, Murray's beginning inventory for July is ZERO. The reason being - July is his first month of operation. That is; in June of 200X, Murray's ending inventory is ZERO, therefore July's beginning inventory must also be ZERO.

Below illustrates Murray's Purchase Budget for 200Y.

As you can see, the Purchase Budget for 200Y is calculated in the same fashion as Murray's 200X Purchase Budget. Notice, 864 units or diskettes are considered to be Murray's Beginning Inventory for January, 200Y. This value represents the Ending Inventory for December 200X. Remember that the Ending Inventory of one month becomes the Beginning Inventory for the following month. (IE the ending inventory for December 200X, becomes the beginning inventory for January 200Y.

Notice, the last value appearing in the column entitled "Next Months Forecasted Sales" (1,080 units) . This value represents Murray's forecasted unit sales for January 200Z. Furthermore, Murray estimates 1,080 people will buy his diskette in January 200Z. January's forecasted sales in units is required here, since Murray's Ending Inventory level is based on "90% of the following month's forecasted unit sales". (IE the month following December 200Y is January 200Z).

Now that Murray has calculated his monthly purchases for 200X and 200Y, he is ready to move onto Part 2 of the Purchase Budget entitled, "Determine How Much Each Month's Purchases Will Cost".