Question

Greener Grass Fertilizer Company plans to sell 270,000 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 90 percent of the next month’s estimated sales. There are 243,000 finished units in inventory on June 30. Each unit of finished product requires 6 pounds of raw material at a cost of $1.35 per pound. There are 720,000 pounds of raw material in inventory on June 30.

Required:

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.)

Independent of your answer to requirement (1), assume the company plans to produce 700,000 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

• All working forms part of the answer
• Requirement 1: Units of finished goods to be produced

	July	August	September	Total Quarter [3 months]
Budgeted Sales units	270000	283500 [270000 + 5%]	297675 [283500 + 5%]	851,175
Add: Desired ending Inventory [90% of next month’s sale]	255150	267907.5	281302.875	281,303
Total requirement	525150	551407.5	578977.875	1,132,478
Less: Beginning Inventory	243000	255150	267907.5	243,000
Total required production in units of Finished Goods	282150	296257.5	311070.375	889,478

• Requirement 2

Units to produce	700000
Raw material required [at 6 pounds per units]	4200000 pounds
Add: Desired ending raw material inventory [25%]	1050000 pounds
Total requirement	5250000 pounds
Less: Beginning raw material inventory in pounds	720000 pounds
Raw material to be purchased	4,530,000 pounds
Total estimated cost of raw material purchases at $1.35 per pound	$6,115,500