Question

Question 2

Marsden makes contact tracing tracking devices and has the following sales budget for the first six months of the year.

January	40,000 units
February	55,000 units
March	60,000 units
April	50,000 units
May	45,000 units
June	40,000 units

The inventory of finished goods at the end of each month is budgeted to be 15% of the next month's sales. Due to unexpected sales activity in the prior year, at the beginning of January the finished goods inventory totaled only 4,500 units.

Each tracking device requires 2 specialized computer chips. Since the supply of the specialized chips is inconsistent, the company keeps an inventory of the specialized chips at the end of each month equal to 45% of the next month's production needs. On January 1 Marsden had 40,000 of the specialized chips in inventory. The chips are stored in a secure storage locker that can hold 250,000 chips.

Required:

1. Prepare a budget showing the quantity of specialized computer chips to be purchased for the first quarter of the year.
2. The purchasing manager may be able to secure a volume discount by purchasing 500,000 chips per order. What impacts (positive and negative) would there be for the company if they decide to purchase 500,000 chips per order?

Answer 1

Part a

Estimated Production units
	January	February	March	April	May	First quarter
Units sold	40,000	55,000	60,000	50,000	45,000	155,000
Add: ending finished goods inventory (next month's sales * 15%)	8,250	9,000	7,500	6,750		7,500
Total needed	48,250	64,000	67,500	56,750		162,500
Less: Beginning finished goods inventory	4,500	8,250	9,000	7,500		4,500
Units To Produced	43,750	55,750	58,500	49,250	-	158,000
Material Budget
	January	February	March	April		First quarter
Units To Produced	43,750	55,750	58,500	49,250		158,000
Multiply: Quantity of raw material Needed per unit	2	2	2	2		2
Production needs	87,500	111,500	117,000	98,500		316,000
Add: ending raw material inventory (next month's Production needs * 45%)	50,175	52,650	44,325			44,325
Total quantity of material Needed	137,675	164,150	161,325			360,325
Less: Beginning raw material inventory	40,000	50,175	52,650			40,000
Purchase of material Quantity	97,675	113,975	108,675			320,325

Part b

Positive impact:- Company can buy material at a lower price by availing the volume discount.

Negative impact:- Company has the capacity to that can hold 250,000 chips. If the company buys 500,000 chips, then the company needs to arrange another secure storage locker for the remaining 250,000 chips. This would increase storage costs.