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 3,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 13,250 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 63,375 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	41,000
August	46,000
September	56,000
October	36,000
November	26,000
December	16,000

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

Production Budget
	July	August	September	October	November
Budgeted Sales	41,000	46,000	56,000	36,000	26,000
Add: Desired Ending Inventory	14,500	17,000	12,000	9,500	7,000
Total Required	55,500	63,000	68,000	45,500	33,000
Less: Beginning Inventory	13,250	14,500	17,000	12,000	9,500
Required Production	42,250	48,500	51,000	33,500	23,500
Direct Material Budget
	July	August	September	Total
Required Production	42,250	48,500	51,000	141,750
Material Per unit	3	3	3	3
Raw material required for production	126,750	145,500	153,000	425,250
Add: Desired Ending Inventory	72,750	76,500	50,250	50,250
Total Required	199,500	222,000	203,250	475,500
Less: Beginning Inventory	63,375	72,750	76,500	63,375
Raw material to be purchased	136,125	149,250	126,750	412,125