Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company now is planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements:

1. The finished goods inventory on hand at the end of each month must equal 2,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 11,250 units.

2. The raw materials inventory on hand at the end of each month must equal one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 57,375 cc of solvent H300.

3. The company maintains no work in process inventories.

A monthly sales budget for Supermix for the third and fourth quarters of the year follows.

	Budgeted Unit Sales
July	37,000
August	42,000
September	52,000
October	32,000
November	22,000
December	12,000

Required:

1. Prepare a production budget for Supermix for the months July, August, September, and October.

	Pearl Products Limited Production Budget July August September October Budgeted unit sales Total needs Required production in units

3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.

	Pearl Products Limited Direct Materials Budget July August September Third Quarter Units of raw materials needed per unit of finished goods cc cc cc cc Units of raw materials needed to meet production Total units of raw materials needed Units of raw materials to be purchased

Answer 1

1
Pearl Products Limited
Production Budget
	July	August	September	October
Budgeted unit sales	37000	42000	52000	32000
Add: Desired units of ending finished goods inventory	12500	15000	10000	7500
Total needs	49500	57000	62000	39500
Less: Units of beginning finished goods inventory	11250	12500	15000	10000
Required production in units	38250	44500	47000	29500
3
Pearl Products Limited
Direct Materials Budget
	July	August	September	Third Quarter
Required production in units of finished goods	38250	44500	47000	129750
Units of raw materials needed per unit of finished goods	3	3	3	3
Units of raw materials needed to meet production	114750	133500	141000	389250
Add: Desired units of ending raw materials inventory	66750	70500	44250	44250
Total units of raw materials needed	181500	204000	185250	433500
Less: Units of beginning raw materials inventory	57375	66750	70500	57375
Units of raw materials to be purchased	124125	137250	114750	376125