Question

15 Sales, production & material purchases budget

Living Corner sells home wares and various other reading related products. One of the stores most popular products is the fulffy lounge pillow. The pillow each sell for $16.00. Originally the pillows were handmade by a local artisan. The store's owner has been impressed with the demand for the pillow and has recently begun a small manufacturing company to produce and distribute the pillows to other stores. Estimated sales for the fourth quarter are as follows:

October	8500
November	9200
December	11600
Total	29300

Each pillow requires half a metre of fabric that costs on average $12 per metre.

Required:

1. Prepare a sales budget for the fourth quarter
2. Prapare a production budget. The company did not have any inventory at the of September, but they want to maintain a 20% inventory at the end of each month based on the next month’s estimates sales. January’s sales are expected to be low, given the post- holiday trends and are estimated to be 5800 units.
3. Prepare a fabric purchases budget. The company did not have any inventory of fabric at the end of September, but they want to a maintain a inventory equal 10 percent of the next month’s material needs. January’s projected production is expected to be 5820 units.

Please provide solution with explanations. Thanks!

Answer 1

A)

Sales Buget for the Fourth Quarter

Particulars October November December Total Sales in Units [A] 8500 9200 11,600 29,300 Selling Price per unit [B] 16.00 16.00 16.00 -- Total Sales ($) [A*B] 136,000 147,200 185,600 468,800

B)

PRODUCTION BUDGET FOR THE FOURTH QUARTER (in units)

Particulars	October	November	December	Total
Sales (A)	8500	9200	11,600	29,300
Add: Closing Inventory* (B)	9200*20% = 1840	11600*20% = 2320	5800*20% = 1160	5320
Total (A+B)	10,340	11,520	12,760	34,620
Less: Opening Inventory (C)	NIL (given)	1840	2320	4160
So, Total Production (A+B-C)	10,340	9,680	10,440	30,460

* Closing Inventory = 20% of sales of next month. Sale of January is given in the question.

C)

PURCHASE BUDGET FOR THE FOURTH QUARTER (in meters)

Particulars	October	November	December	Total
Total Production (units) (as per Production budget above)	10340	9680	10440	30460
So, Total material required (A)	10340*1/2 = 5170	9680*1/2= 4840	10440*1/2= 5220	15230
Add: Closing stock of Materials (B)	4840*10% = 484	5220*10%= 522	(5820*1/2)*10%= 291	1297
Total (A+B)	5654	5362	5511	16527
Less: Opening Stock of Materials (C)	NIL (given)	484	522	1006
Total Material to be purchased (A+B-C)	5654	4878	4989	15521

* Closing Stock of Materials= 10% of material required of next month. Production of January is given in the question.

Purchase Budget (in dollars)

Particulars	October	November	December	Total
Total Materials to be purchases (in meters) (A) (from the above table)	5654	4878	4989	15521
Cost per Meter (B) (GIVEN)	12$	12$	12$	---
So, Total Purchases (A*B)	$ 67848	$ 58536	$ 59868	$186,252

Please comment for any clarifications on the problem.