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:

1. The finished goods inventory on hand at the end of each month must equal 2,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 17,250 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 93,375 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	61,000
August	66,000
September	76,000
October	56,000
November	46,000
December	36,000

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

Production Budget
	July	August	September	October	November
Budgeted Sales	61,000	66,000	76,000	56,000	46,000
Add: Desired Ending Inventory	18,500	21,000	16,000	13,500
Total Required	79,500	87,000	92,000	69,500
Less: Beginning Inventory	17,250	18,500	21,000	16,000
Required Production	62,250	68,500	71,000	53,500
Direct Material Budget
	July	August	September	Total
Required Production	62,250	68,500	71,000	201,750
Material Per unit	3	3	3	3
Raw material required for production	186,750	205,500	213,000	605,250
Add: Desired Ending Inventory	102,750	106,500	80,250	80,250
Total Required	289,500	312,000	293,250	685,500
Less: Beginning Inventory	93,375	102,750	106,500	93,375
Raw material to be purchased	196,125	209,250	186,750	592,125