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Why some groups had sales volume of 1,300,000 even in the first period?
- Indeed, the inventory of raw materials is 1.18 mio at the first period, which is the same for every company.
- Any procurement of raw materials at the first period will become inventory at the second period, and therefore not available to support production in the first period.
- Even by using up all 1.18 mio raw materials to make 802,400 units of finished goods (considering the conversion coefficient of 0.68), the max sales volume is nowhere near 1.3 mio assuming every unit is sold.
- The answer lies with “emergency purchase”.
- A company can decide on a production volume exceeding what the inventory of raw materials can support. However, the company must pay a price of an additional $1.50 for each unit that can be purchased on an “emergency basis” to support the
- It could be that the company’s strategy is to conquer much more market share in the first period and is sure that the additional cost can be recovered from the profits in the following periods. It could also be that the company is not even aware of the penalty and it was therefore a mistake that they will regret
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