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 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:

a. The Finished goods inventrory on hand at the end of each month must equal 3,000 units of Supermix plus 20% of the next months sales. The finished goods invenroy on June 30 is budgeted to be 10,000 units.

b. The raw materials inventory on hand at the end of each month must equal one-half of the folwing months production needs for raw materials. The Raw materials inventory on June 30 is budgeted to be 54,000 cc of solvent H300.

c. The company maintains no work in process inventories. A monthly sales budget for Supermix for the third and fourth quarters of the year follows:

July- 35,000

August- 40,000

Septmeber 50,000

October 30,000

November 20,000

December 10,000

1. Prepare a productino budget for Supermix for the months July/ August/ September and October.

2. Examine the Production budget that you prepared in (1). Why will the cmopany produce more units than it sells in July and August and fewer units than it sells in 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

	July	August	September	October
Budgeted sales	35000	40,000	50,000	30,000
Add: Desired Ending inventory (20%of next month+3000)	11000	13000	9000	7000
Total needs	46000	53000	59000	37000
Less: Beginning Inventory	10,000	11000	13000	9000
Required production	36,000	42,000	46,000	28,000

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2

During the month of the July and august company is making inventory to meet the requirement of September month high demand so that is why production exceeds sales units this month

During the month of the September and October company is reducing the inventory to because of the lower requirement of November and month December because this month has lower sales so company can cutback the inventory level

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3

	July	August	September	Third Quarter
Required production (units)	36,000	42,000	46,000	124,000
Material H300 needed per unit	x 3CCC	x 3CCC	x 3CCC	x 3CCC
Production need (CC)	108000	126000	138000	372000
Add: Desired ending inventory (CC)	63000	69000	42000	42000
Total Material H300 on hand	171000	195000	180000	414,000
Less: Beginning Inventory (CC)	54000	63000	69000	54000
Material H300 needed Purchase	117000	132000	111000	360,000