Question

TJR, Inc. is working on its raw materials purchases budget for the month of February. Sales for February and March are projected to be 40,000 and 45,000 units respectively. Production from the production budget is to be 43,000 and 39,000 units for February and March. Each unit produced requires 4 pounds of direct materials that costs $10 per pound. TJR likes to keep 40% of the required direct materials for the next month in inventory at all times but at the end of January ending direct materials inventory was 62,000 pounds. How many dollars of direct materials should be purchased and shown on the cash flow budget?

Question 15 options:

	171,600
	530,000
	1,724,000
	172,400

Answer 1

The answer is 1,724,000 dollars of direct materials should be purchased and shown in cash flow budget. The reason is explained as below :

To calculate direct materials purchase budget we use below formula

Direct Materials Required for Production + Ending Direct Material Inventory Required - Begining Direct material inventory = Direct Materials to be purchased

We need answer in Dollars then we have to convert the details in dollars

Direct Materials Required for Production : 43000 units

Each unit production cost is 4 pounds which are again equal to 10 dollars each pound. Therefore each unit cost in dollars are 40 dollars (10 dollars x 4).

Therefore, Direct Materials Required for Production in dollars = 43000 units x 40 dollars = 1720000 dollars.

Ending Direct Materials Inventory required is 40% of March production budget.

March Production Budget is 39000 units and

March Production Budget in Dollars = 39000 units x 40 dollars = 1560000 dollars and

Ending Direct Material inventory required is 40% of 1560000 dollars = 624000 dollars

Begining Direct Materials Inventory (i.e. end of January Inventory) = 62000 pounds

Begining Direct Materials in Dollars = 62000 x 10 = 620000 ( 1 Pound = 10 dollars as written in the question).

Finally, we have all the values :

Direct Materials Required for Production : 1720000 dollars

Ending Direct Material Inventory Required : 624000 dollars

Beginning Direct Materials Inventory : 620000 dollars

Formula is

Direct Materials Required for Production + Ending Direct Material Inventory Required - Begining Direct material inventory = Direct Materials to be purchased

Therefore Direct Materials to be purchased =

(1720000 dollars + 624000 dollars) - 620000

= 2344000 dollars - 620000 dollars

= 1724000 dollars  

Answer : 1724000 dollars of direct materials should be purchased and shown in cash flow budget.