Question

1. Crown Inc. is experiencing a buildup of inventory on an annual basis. Crown has hired you to help understand why this is happening and how to correct it. Crown believes they have a competent management team that generates excellent results with respect to net income. Crown compensates its management team with both a competitive salary and bonus based on achieving a target net income. Crown Inc. has provided the following data for 2018:

Direct materials	$10	per unit
Direct labor	$15	per unit
Variable manufacturing overhead	$20	per unit
Fixed manufacturing overhead	$25,000	per year
Fixed selling and administrative costs	$15,000	per year
Sale price	$75	per unit
Beginning inventory	500	units
Units produced	5,000	units
Units sold	4,500	units

Required:

a) What are the possible reasons Crown is experiencing inventory buildup? You must support your answer.

b) What suggestion(s) do you have for Crown?

Answer 1

Question a)

Possible reasons of experiencing Inventory Buildup for Crown can be as under:-

1. Items have been ordered in excess of the requirement.

2. Items are not being sold out at the price we used to sale.

The reasons behind the above two scenario can as follows:-

1. Items have been ordered in excess of the requirement therefore had to use the same for production resulted in Inventory buildup.

A. May be Crown were getting best for the raw material, if we buy more of it.

B. May be Crown received an order of 500 items but we had to insert the raw material to manufacture 550 items to avoid contingencies and the same manufactured 550 items out of which 500 sold out as per the purchase order but 50 items becomes inventory buildup.

C. May be Crown got order for 500 items of some specific quality but the same could not made up to the satisfaction level of the vendor or the quality parameters of the finished goods doesn't match with the required one's, resulting in inventory buildup.

D. This may happen due to discontinuance of manufacturing of some specific product which required that specific type of Raw material.

E. Due to technology change or required specifications of the product gets changed.

Question b)

Suggestions for Crown are as under:-

A. inventory items which are without any defect of issue should be addressed and pending orders since a long period (if any) shall be cancelled and the same should be used for the products which are of regular sales nature.

B. If some Material was received for use in some new project which will be started in near future, the same should be identified and marked accordingly.

C. The Items which are of no such use for the organisation shall be disposed in the in the open marked at some discounted price i.e. in factory outlets

D. Items which can be used as a substitute, should be utilized as soon as possible before making order for new requirement.

Thanks and Regards