Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company now is planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements:

1. The finished goods inventory on hand at the end of each month must equal 2,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 10,600 units.

2. The raw materials inventory on hand at the end of each month must equal one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 66,000 cc of solvent H300.

3. The company maintains no work in process inventories.

A monthly sales budget for Supermix for the third and fourth quarters of the year follows.

	Budgeted Unit Sales
July	43,000
August	48,000
September	58,000
October	38,000
November	28,000
December	18,000

Required:

1. Prepare a production budget for Supermix for the months July, August, September, and October.

3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.

Answer 1

Solution 1:

Pearl Products Ltd
Production Budget
Particulars	July	August	September	October
Budgeted unit Sales	43000	48000	58000	38000
Add: Desired ending inventory (20% of next month sales + 2000)	11600	13600	9600	7600
Total Needs	54600	61600	67600	45600
Less: Beginning Inventory	10600	11600	13600	9600
Required production in units	44000	50000	54000	36000

Solution 3:

Pearl Products Ltd
Material Purchase Budget
Particulars	July	August	September	Third Quarter
Budgeted production in units	44000	50000	54000	148000
Material needed per unit (Cubic Centimeters)	3	3	3	3
Units of Material needed to meet produce (Cubic Centimeters)	132000	150000	162000	444000
Add: Desired units of material in ending inventory (50% of following month needs)	75000	81000	54000	54000
Total units of raw material needed	207000	231000	216000	498000
Less: units of material in beginning inventory	66000	75000	81000	66000
Units of raw material to be purchased	141000	156000	135000	432000