Question

Greener Grass Fertilizer Company plans to sell 250,000 units of finished product in July and anticipates a growth rate in sales of 5 percent per month. The desired monthly ending inventory in units of finished product is 80 percent of the next month’s estimated sales. There are 200,000 finished units in inventory on June 30. Each unit of finished product requires 5 pounds of raw material at a cost of $1.75 per pound. There are 780,000 pounds of raw material in inventory on June 30.

Required:

1. Compute the company’s total required production in units of finished product for the entire three-month period ending September 30. (Round all intermediate calculations and your final answer to the nearest unit.)

2. Independent of your answer to requirement (1), assume the company plans to produce 680,000 units of finished product in the three-month period ending September 30, and to have raw-material inventory on hand at the end of the three-month period equal to 25 percent of the use in that period. Compute the total estimated cost of raw-material purchases for the entire three-month period ending September 30.

Answer 1

1) Schedule for Required Production in units

	July	August	September	Total of quarter
Estimated Sales during the month	250,000	262,500 (250,000*105%)	275,625 (262,500*105%)
Ending Inventory required (80% of next month estimated sales)	210,000	220,500	231,525
Opening Inventory (Ending inventory of previous month)	(200,000)	(210,000)	(220,500)
Required Production in units	260,000	273,000	286,650	819,650

Working Notes :

Sales for October = (275,625)*105% = 289,406

Ending Inventory required for the month of September = (289,406)*80% = 231,525

2) Step 1 : Calculation of Raw Material to be purchased for production

Units to be produced = 680,000 units

Raw material Required to produce 680,000 units = 680,000 units * 5 pounds = 3,400,000 pounds

= 3,400,000 pounds - Raw material in hand

= 3,400,000 pounds - 780,000 pounds

= 2,620,000 pounds

Raw Material Required at the end = 25% of Raw Material Required to produce 680,000 units

= 25% * 3,400,000 pounds

= 850,000 pounds

Raw Material to be Purchased = 2,620,000 pounds + 850,000 pounds = 3,470,000 pounds

Step 2 : Calculation of Estimated Cost of Raw Material to be purchased

Estimated Cost = 3,470,000 pounds *$1.75 per pound

= $6,072,500