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 is now 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:

a. The finished goods inventory on hand at the end of each month must be equal to 4,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 21,250 units.

b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 88,000 cc of solvent H300.

c. The company maintains no work in process inventories.

A sales budget for Supermix for the last six months of the year follows.

	Budgeted Sales in Units
July	69,000
August	74,000
September	84,000
October	64,000
November	54,000
December	44,000

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.

Please show your work

Answer 1

Required 1 :
Pearl Products Limited
Production Budget
	July	August	September	October
Budgeted unit sales	69000	74000	84000	64000
(+) Desired units of ending finished goods inventory ( 4000 + 25% of next month's sales )	22500	25000	20000	17500
Total needs	91500	99000	104000	81500
(-) Units of Beginning finished goods inventory	21250	22500	25000	20000
Required production in units	70250	76500	79000	61500

Note : October's ending inventory = 4000 + ( 25% * November unit sales ) = 4000 + ( 25% * 54000 )

17500

Required 2 :
Preal Products Limited
Direct materials budget
	July		August		September		Third Quarter
Required production in units	70250		76500		79000		225750
Units of raw materials needed per unit of finished goods	3	cc	3	cc	3	cc	3	cc
Units of raw materials needed to meet production	210750		229500		237000		677250
(+) Desired units of ending raw materials inventory ( One-half of following month's production needs )	114750		118500		92250		92250
Total units of raw materials needed	325500		348000		329250		769500
(-) Units of Beginning raw materials inventory	88000		114750		118500		88000
Units of raw materials to be purchased	237500		233250		210750		681500

Note : September's ending inventory = 1/2 * October month's production needs = 1/2 * ( 61500 * 3 )

92250