Question

Estimating production costs

The Fancy Umbrella Company makes beach umbrellas. The production process requires 3 square meters of plastic sheeting and a metal pole. The plastic sheeting costs $0.50 per square meter and each metal pole costs $1.00. At the beginning of the month, the company has 5,000 square meters of plastic and 1,000 poles in raw material inventory. The preferred raw material amount at the end of the month is 3,000 square meters of plastic sheeting and 600 poles. The company has 300 finished umbrellas in inventory at the beginning of the month and plans to have 200 finished umbrellas at the end of the month. Sales in the coming month are expected to be 5,000 umbrellas.

Required

a. How many umbrellas must the company produce to meet demand and have sufficient ending inventory?

b. What is the cost of materials that must be purchased?

Answer 1

a. The total number of umbrellas that the company would be required to produced would be :
  
Total Number of umbrellas to be produced = Umbrella required in the month - Umbrellas in inventory
= (Expected Sales + Closing Inventory) - Opening Inventory
= (5000+200) - 300

= 5200 - 300 = 4900 umbrellas are to be produced (Answer)

b. Cost of Plastic Materials to be purchased

Quantity of Plastic Required to be purchased = Plastic sheet required to produce 4900 umbrellas + Plastic sheet preferred in stock at the end of the month - Opening stock of plastic sheets

= 4900*3 sq meters + 3000 sq meters - 5000 sq meters

= 14700+3000-5000

= 12700 sq meters of plastic sheets is required to be bought

Cost of purchasing 12700 sq meters of plastic sheets = 12700 * $0.50

= $6350 (A)

Cost of Metal Poles to be purchased

Quantity of Metal Poles to be purchased = Metal poles required to produce 4900 umbrellas + Metal poles preferred in stock at the end of the month - Opening stock of metal poles

= 4900*1 pole + 600 poles - 1000 poles

= 4900+600-1000

= 4500 metal poles are required to be purchased.

Cost of purchasing 4500 metal poles = 4500 * $1.00

= $4500 (B)

Answer : Total cost of materials to be purchased = Cost of plastic sheets to be purchased (A) + Cost of metal poles to be purchased (B)

= 6350+4500

= $10,850