Question

San Fernando Fertilizer Company plans to sell 280,000 units of finished product in July and anticipates a growth rate in sales of 4 percent per month. The desired monthly ending inventory in units of finished product is 80 percent of the next month's estimated sales. There are 224,000 finished units in inventory on June 30. Each unit of finished product requires 3 pounds of raw material at a cost of $1.55 per pound. There are 740,000 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. (Do not round intermediate calculations. Round your final answer to the nearest unit.)

        

2.

Independent of your answer to requirement (1), assume the company plans to produce 600,000 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

(1).

Projected sales;
July	280000
August (280000 * 1.04)	291200
September (291200 * 1.04)	302848
Total sales	874048
Add: Desired ending inventory at end of september	251970
	1126018
Less: Finished units in inventory on June 30	(224000)
Total quarterly production requirement for all three months	902018

Working Note;

Desired ending inventory at end of september will be calculated as follow;

Estimated sale for October (302848 * 1.04) = 314962

Hence desired ending inventory at end of september (314962 * 0.80) = 251970

(2).

Material to be used in production (600000 units * 3 pounds)	1800000
Add: Desired ending inventory on September 30 (1800000 x 0.25)	450000
Total materials required in production	2250000
Less: Raw material in inventory on June 30	(740000)
Raw materials be be purchased during three months	1510000
Raw materials cost per pound	$1.55
Total estimated cost of raw-material purchases for the entire three months (1510000 * $1.55)	2340500