Question

Exercise 9-25 Budgeting Production and Raw-Material Purchases (LO 9-3, 9-6)

Greener Grass Fertilizer Company plans to sell 200,000 units of finished product in July and anticipates a growth rate in sales of 5 percent per month. The desired monthly ending inventory in units of finished product is 80 percent of the next month’s estimated sales. There are 160,000 finished units in inventory on June 30. Each unit of finished product requires four pounds of raw material at a cost of $1.15 per pound. There are 700,000 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.
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.

1 Total required production in Units =

2 Total estimated cost =

Answer 1

1.required production in units

	July	August	september	Total
Sales	200,000	210,000[200,000*105%]	220,500[210,000*105%]	630,500
add: desired ending inventory	168,000[210,000*80%]	176,400[220,500*80%]	185,220[220,500*105%]*80%	185220
LesS: beginning inventory	160,000	168,000	176,400	-160000
Production in units	208,000[200,000+168,000-160,000]	218,400[210,000+176,400-168,000]	229,320[220,500+185,220-176400]	655,720

Total required production in units = 655,720

2.each unit requires 4 pound of rawmaterial

Production	600,000 units
per unit RM	4
Total raw material required	2,400,000 [600,000*4]
Add: desired ending inventory	600,000[2,400,000*25%]
Less: beginning inventory	700,000
raw material purchase	2,300,000
cost per pound	$1.15
estimated cost	$2,645,000 [2,300,000*$1.15]

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