Question

ABC Company’s budgeted sales for June, July, and August are 12,000, 16,000, and 14,000 units, respectively. ABC requires 30% of the next month’s budgeted unit sales as finished goods inventory each month. Budgeted ending finished goods inventory for May is 3,600 units. Each unit that ABC Company produces uses 3 pounds of raw material. ABC requires 25% of the next month’s budgeted production as raw material inventory each month. Required: Calculate the number of pounds of raw material to be purchased in June.

Answer 1

Solution:
	The number of pounds of raw material to be purchased in June = 41,250
Working Notes:
	Computation no of units produced in June & July
	Budgeted ending finished goods inventory for May		3,600
	Beginning Inventory of finished goods in June		3,600
	Ending finished goods inventory for June		4,800
	[30% of sales of July 16,000units]
	[30%x16,000]
	Sales units of June		12,000
Hence,
	No. of units to be produced in June = Sales units + Ending finished goods units - Beginning inventory of finished goods
		=12,000+4,800-3,600
		=13,200 units
Now for July
	Beginning Inventory of finished goods in July		4,800	calculated above
	Ending finished goods inventory for July		4,200
	[30% of sales of August 14,000 units]
	[30%x14,000]
	Sales units of July		16,000
	No. of units to be produced in July = Sales units + Ending finished goods units - Beginning inventory of finished goods
		=16,000+4,200-4,800
		=15,400 units
Hence,
	Inventory required is for units to be produced in June & 25% of the July budgeted production as raw material Ending inventory
	Raw material to be purchased for units required = Units to be produced in June + Ending inventory of raw material required is 25% of July production - Beginning inventory of raw material is 25% of June production
		=13,200 units + (25% x 15,400) - (25%x13,200)
		=13,200 + 3,850-3,300
		=13,750 units
	The number of pounds of raw material to be purchased in June = no of units for which raw material required x Raw material required per unit
		=13,750 x 3 pound
		=41,250 pound
Notes:	It is assumed that since, all computation is budgeted , raw materials beginning inventory is also there of 25% of June production, as question specify that the company requires 25% of the next month’s budgeted production as raw material inventory each month.
Please feel free to ask if anything about above solution in comment section of the question.