Production managers must balance inventory levels carefully. Holding too much finished stock locks up working capital and increases warehouse expenses, while holding too little risks stockouts and lost sales.

To calculate the exact number of units a factory must produce during a period, use the standard production equation:

Units to Be Produced = Sales + Ending Inventory − Beginning Inventory

Once production volumes are finalized, the procurement team uses a two-step formula to calculate raw material purchasing requirements:

1) Materials Needed for Production = Units to Be Produced × Standard material per unit (kg/liters)

2) Materials to Be Purchased = Materials Needed for Production + Desired closing material stock − Opening material stock

3) Total Purchase Cost = Materials to Be Purchased × Standard cost per unit