Readymade Textiles Ltd. makes and sells baby suits. It has brisk sales in the October-December period as shown by the following sales budget (in units): The firm’s normal inventory policy has been to...

Readymade Textiles Ltd. makes and sells baby suits. It has brisk sales in the October-December period as shown by the following sales budget (in units):

The firm’s normal inventory policy has been to have a two months’ supply of finished product on hand. The production manager has criticised the policy because it requires wide swings in production, which adds to costs. He estimates that unit-variable manufacturing cost is `2 higher than normal for each unit produced in excess of 9,000 units per month. The finance manager also supports the production manager on this. He estimates that it costs the firm `1 per unit in ending inventory, consisting of insurance, financing, and handling costs. He stresses that these costs are variable. All the managers agree that the firm should have 22,500 units on hand by the end of October. The production manager wants to spread the required production equally over the four months.

(i) Prepare a production budget for July-October following the firm’s current policy. Inventory on July 1 is 10,000 units.

(ii) Prepare a production budget using the production manager’s preference.

(iii) Determine which budget gives lower costs.