Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout Southeast 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 3,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 13,250 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 63,375 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	41,000
August	46,000
September	56,000
October	36,000
November	26,000
December	16,000

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 Limited
Production Budget
Particulars	July	August	September	October
Budgeted unit sales	41000	46000	56000	36000
Add: Desired Ending Inventory	14500	17000	12000	9500
Total needs	55500	63000	68000	45500
Less: Beginning inventory	13250	14500	17000	12000
Required production in units	42250	48500	51000	33500

Solution 3:
Pearl Products Limited
Direct Materials Budget
Particulars	July	August	September	Third Quarter
Budgeted Production Units	42250	48500	51000	141750
Units of raw materials needed per unit of finished goods (in cc)	3	3	3	3
Units of raw materials needed to meet production (In cc)	126750	145500	153000	425250
Add: Desired Ending inventory of raw materials	72750	76500	50250	50250
Total units of raw materials needed	199500	222000	203250	475500
Less: Beginning inventory of raw materials	63375	72750	76500	63375
Units of raw materials to be purchased (In cc)	136125	149250	126750	412125