Question

San Fernando Fertilizer Company plans to sell 240,000 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 204,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of raw material at a cost of $1.55 per pound. There are 870,000 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 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

1) For computing required production in units of finished product for the entire three month period, we need to calculate units sold and ending inventory for every three month which is shown as follows:-

Calculation of units produced (in units)

Particulars	July	August	September	Quarter
Units sold (with a growth of 3% per month)	240,000	247,200	254,616	741,816
Ending inventory (85% of next month sales)	210,120	216,424	222,916	222,916
Less: Beginning inventory	(204,000)	(210,120)	(216,424)	(204,000)
Units required to produced	246,120	253,504	261,108	760,732

Hence required production of finished product for the entire three month period is 760,732 units.

2) Total raw materials use in the period = Production of finished goods*raw material per unit of finished good

= 640,000 units*4 pounds = 2,560,000 pounds

Raw material inventory at the end = Raw materials use in the period*25%

= 2,560,000 pounds*25% = 640,000 pounds

Raw material inventory at the beginning = $870,000 pounds

Raw material required to purchased = Raw material used+Ending raw material-Beginning raw material

= 2,560,000+640,000-870,000 = 2,330,000 pounds

Estimated cost of raw material purchase = Pounds purchased*Cost per pound

= 2,330,000 pounds*$1.55 per pound = $3,611,500