Question

Greener Grass Fertilizer Company plans to sell 250,000 units of finished product in July and anticipates a growth rate in sales of 3 percent per month. The desired monthly ending inventory in units of finished product is 85 percent of the next month’s estimated sales. There are 212,500 finished units in inventory on June 30. Each unit of finished product requires 5 pounds of raw material at a cost of $1.15 per pound. There are 800,000 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 640,000 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

Part 1)

Total required production in units of finished product for the entire three-month period ending September 30 is calculated as below:

Sales for the Month of July	250,000
Sales for the Month of August [250,000*(1+3%)]	257,500
Sales for the Month of September [257,500*(1+3%)]	265,225
Total Sales for the Period Ending September 30	772,725
Add Desired Ending Inventory, September 30 [265,225*(1+3%)*85%]	232,204
Less Desired Ending Inventory, June 30	212,500
Total Required Production in Units of Finished Product	792,429

Answer for Part 1) is 792,429 units.

_____

Part 2)

The total estimated cost of raw-material purchases for the entire three-month period ending September 30 is determined as follows:

Estimated Production during 3 Month Period (A)	640,000
Raw Material Per Unit (B)	5
Total Raw Material Required for Production (A*B)	3,200,000
Add Desired Ending Raw Material Inventory, September 30 [3,200,000*25%]	800,000
Less Desired Ending Raw Material Inventory, June 30	800,000
Total Raw Material to be Purchased (C)	3,200,000
Cost Per Pound of Raw Material (D)	1.15
Total Estimated Cost of Raw-Material Purchases (C*D)	$3,680,000

Answer for Part 2) is $3,680,000.