Question

Greener Grass Fertilizer Company plans to sell 300,000 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 240,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of raw material at a cost of $1.45 per pound. There are 710,000 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. (Round all intermediate calculations and your final answer to the nearest unit.)
2. Independent of your answer to requirement 1, assume the company plans to produce 720,000 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.

Answer 1

Solution

1.
	July	August	September	October
Estimated sales units	300,000	315,000 [ 300,000*(1+5%) ]	330,750 [ 315,000*(1+5%) ]	347,288 [ 330,750*(1+5%) ]
(+) Desired ending inventory [ 80% of next month's estimated sales ]	252,000	264,600	277,830
Total units needed	525,000	579,600	608,580
(-) Beginning inventory	240,000	252,000	264,600
Required production in units	285,000	327,600	343,980
Total required production in units = 285,000 + 327,600 + 343,980	956,580

2.
Production in units	720000
(*) Raw materials needed per unit (pounds)	4
Total raw materials to be used for production	28,80,000
(+) Desired ending inventory of raw materials ( 28,80,000 * 25% )	720,000
Total raw materials needed	3600,000
(-) Beginning inventory of raw materials	710000
Raw materials to be purchased	28,90,000
(*) Cost per pound of raw materials	1.45
Total estimated cost	41,90,500

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