Question

Greener Grass Fertilizer Company plans to sell 270,000 units of finished product in July and anticipates a growth rate in sales of 6 percent per month. The desired monthly ending inventory in units of finished product is 75 percent of the next month’s estimated sales. There are 202,500 finished units in inventory on June 30. Each unit of finished product requires 3 pounds of raw material at a cost of $1.95 per pound. There are 740,000 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 600,000 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

Ans:

Calculation of production requirement in units for 3 months:

Opening Inventory = 202,500 units

Sales estimate:

July ; 270,000 units

August : 270,000+6% of 270,000 = 286,200 units

September: 286,200+ 6% of 286,200 = 303,372 units

October : 303,372 + 6% of 303,372 units = 321,574 units

Production for 3 months (July , august & september) will be:

25% of July production , 100% of august, 100% of september , 75% of october

= 25%(270,000) + 286,200 + 303,372 + 75%(321,574) = 898,254 Units

2.

Production units for 3 months = 600,000 units

Raw Material per unit = 3 pounds

Material required= 600,000*3 = 1,800,000 pounds

Opening material = 740,000 pounds

Closing inventory = 25% of 1,800,000 pounds = 450,000 pounds

Material to be purchased = material required for production + closing material - opening material

= 1,800,000- 740,000 + 450,000 = 1,510,000

Cost of metrial = $1.95 per pound.

Cost of total material produced in three month = 1,510,000*1.95 = $2,944,500