The following table presents Generic Motors Company’s production budget. GM’s inventory policy is to have ending inventory equal to20% of next month’s sales.

February March April
Ending inventory 5,000
Beginning inventory 2,000
Budgeted sales 13,000 17,000 18,000
Budgeted production

(a) Fill in the missing numbers in the table above.
(Hint if you get stuck: What is the relation between ending inventory for one month and beginning inventory for the following month?)

b) Why do firms want to hold inventory of finished goods? (an alternative could be to produce exactly the amount they are going to sell, and hold zero inventories)