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 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 15,400 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 102,000 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	67,000
August	72,000
September	82,000
October	62,000
November	52,000
December	42,000

Required:

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

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.

Answer 1

Answer 1.
Production Budget For Supermix
	July	Aug	Sep	Oct	Nov
Sales in units	67,000	72,000	82,000	62,000	52,000
Add: Ending Inventory in units	16,400	18,400	14,400	12,400	10,400
	(2,000 + 72,000X 20%)	(2,000 + 82,000X 20%)	(2,000 + 62,000X 20%)	(2,000 + 52,000X 20%)	(2,000 + 42,000X 20%)
Total Needs	83,400	90,400	96,400	74,400	62,400
Less: Beginning Inventory in units	(15,400)	(16,400)	(18,400)	(14,400)	(12,400)
Desired Production in unit	68,000	74,000	78,000	60,000	50,000
Answer 2.
Direct Material Purchase Budget for Solvent H300
	July	Aug	Sep	Total	Oct
Desired Production in unit	68,000	74,000	78,000	220,000	60,000
Solvent H300 Required per Unit (in cc)	3	3	3	3	3
Total H300 required for Production in cc	204,000	222,000	234,000	660,000	180,000
Desired Ending Inventory of H300 -50%	111,000	117,000	90,000	90,000
	(50% X 222,000)	(50% X 234,000)	(50% X 180,000)
Total H300 be available (in cc)	315,000	339,000	324,000	750,000
Beginning H300 Inventory (in cc)	(102,000)	(111,000)	(117,000)	(102,000)
Total H300 to be Purchased (in cc)	213,000	228,000	207,000	648,000