Question

Lyon Factory Ltd. manufactures two products: chairs and stools. Each chair requires 3 m of upholstery and 4 kg steel. Each stool requires 2 m of upholstery and 5 kg of steel. Upholstery costs $2 per meter and steel costs $5 per kilogram. Lyon Factory expects inventories at January 1, 2017, to be as follows: Chairs Stools Upholstery 25 units 15 units 75 m Inventories of raw materials should not be allowed to fall below the amounts given as at January 1, 2017. Inventories of finished furniture at the beginning of each month should be enough to cover 25% of the anticipated sales for that month. Upholstery is ordered in units of 100 m and steel in units of 50 kg. Half of the materials purchased are paid for in the month of purchase and the other half in the following month. The sales budget for the first three months for the year 2017 is as follows: January February March Chairs 100 units 120 units 80 units Stools 60 units 80 units 60 units HINT - Remember start with sales and production budgets start with finished goods units. Use the information provided to answer the following questions: a) 745 kilograms of steel is required for January's actual production and 815 kilograms of steel is required for February's actual production. How many kilograms of steel will Lyon Factory Ltd. need to purchase in each of the following months January kilograms February kilograms b) What is the expected total cost of the steel purchases in each of the following months: January: $ February: $ c) What is the expected cash disbursement in February for purchases of steel?

Answer 1

Answer with working is given below

Working note January February Steel needed for consumption Add: Closing inventory Total Needs Less: Opening Inventory Purchases 745 815 20 55 765 870 15 20 750 850 Order Quantity multiples of 750 kilograms 850 kilograms January February a) Total cost of Steel purchase b) $5.00 per kilogram Purchase price $3,750 $4,250 January February Expected Cash disbursements $4,000 c) January purchase 50% February purchase 50% Total cash disbursements $1,875 $2,125 $4,000 50