Question

A. Weed Master 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 May 31. 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 May 31.

Required: a. Compute the company’s total required production in units of finished product for the entire three-month period ending August 31.

b. Independent of your answer to requirement (A), assume the company plans to produce 600,000 units of finished product in the three-month period ending August 31, 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 August 31

Answer 1

Ans a)To calculate company’s total required production in units of finished product for the entire three-month period ending August 31.

Sol: Estimated sales for June= 160000* 100/ 80= 2,00,000 units

Required Production for June= 2,00,000 units

Estimated sales for July= 2,00,000 units

Required Production for July= 2,00,000 units

Estimated sales for August= 5% of 2,00,000+ 2,00,000=10000+ 2,00,000= 210000 units

Required Production for August = 210000 units

Hence.

Required production of Finished products for three months period ending August 31st

= Required production for June+ Required production for July + Required production August

= 2,00,000 + 2,00,000 + 2,10,000

=6,10,000 units

b) To assume the company plans to produce 600,000 units of finished product in the three-month period ending August 31, 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.

To Compute the total estimated cost of raw-material purchases for the entire three-month period ending August 31

Sol:

1 finished unit= 4 ponds of raw material

600000 units of finished item( for three months period)= 4* 600000 pounds of raw material

= 24,00,000 pounds of raw material

Total raw material purchased( at the end of three months)= Raw material for finished products + raw materials for inventory at hand

  =( 24,00,000+ 25% of 24,00,000) pounds

= (24,00,000+ 6,00,000) pounds

= 30,00,000 pounds

Hence,

Total estimated cost of raw material purchased for entire three months period ending August 31st

= 30,00,000* 1.15

=$34,50,000