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 is now 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:

a. The finished goods inventory on hand at the end of each month must be equal to 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.

b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 60,000 cc of solvent H300.

c. The company maintains no work in process inventories.

A sales budget for Supermix for the last six months of the year follows.

	Budgeted Sales in Units
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

Pearl Products Limited
Production budget
	July	August	September	October
Units to be sold	41000	46000	56000	36000
Desired Ending Finished Inventory	14500	17000	12000	9500*
Total Units needed	55500	63000	68000	45500
Less : Beginning Finished Inventory	13250	14500	17000	12000
Units to be Produced	42250	48500	51000	33500

*November units x 25%+3000

Pearl Products Limited
Direct Materials Budget
for the month of------
	July	August	September	Third Quarter
Budgeted production (units)	42250	48500	51000	141750
Materials requirements per unit	3	3	3	3
Materials needed for production (cc)	126750	145500	153000	425250
Budgeted ending inventory (cc.)	72750	76500	50250*	50250
Total materials requirements (cc.)	199500	222000	203250	475500
Beginning inventory (cc.)	63375	72750	76500	63375
Materials to be purchased (cc.)	136125	149250	126750	412125

*(33500*3)*50%