Question

A manufacturing business makes and sells widgets. Each widget requires two units of raw materials which costs $3.00 each. Production and sales quantities of widgets each month are as follows: Month Sales and Production December (Actual) 50,000 units January (Budget) 55,000 units February (Budget) 60,000 units March (Budget) 65,000 units In the past the business has maintained its inventories of raw materials at 100,000 units. However, it plans to increase raw materials inventories to 110,000 units at the end of January and 120,000 units at the end of February. The business takes one months credit from its suppliers. Calculate the forecast payment to suppliers each month for raw material purchases.

Answer 1

Calculaton of Amount to be paid to Supplier each month-

Month	Opening inventory	Closing Inventory (Qty)	Production and sales	Qty required for production @2unit/ widget	Additional quantity to be purchased	Rate per unit	Amount payable to supplier	Amount paid (with one month credit)
a	b	c	d	e= d*2	f=e-b+c	g	h=f*g	i
December	100000	100000	50000	100000	100000	$3	$300,000	-
January	100000	110000	55000	110000	120000	$3	$360,000	$300,000
February	110000	120000	60000	120000	130000	$3	$390,000	$360,000
March	120000	0	65000	130000	10000	$3	$30,000	$390,000

Amount to be paid in the month of April = Amount payable in the month of March = $30,000

Note:- In the absence of any Information, closing inventory for the month of March is assumed to be Nil. alternatively, you can assume it to be equal to 1,20,000 and solve accordingly.

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