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:

The finished goods inventory on hand at the end of each month must equal 3,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 12,400 units.

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 72,000 cc of solvent H300.

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	47,000
August	52,000
September	62,000
October	42,000
November	32,000
December	22,000

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

Solution

Pearl Products Limited
Production budget
	July	August	September	October
Units to be sold	47000	52000	62000	42000
Desired Ending Finished Inventory	13400	15400	11400	9400*
Total Units needed	60400	67400	73400	51400
Less : Beginning Finished Inventory	12400	13400	15400	11400
Units to be Produced	48000	54000	58000	40000

*32000 x 20%+ (3000)

Pearl Products Limited
Direct Materials Budget
for the month of------
	July	August	September	Third Quarter
Budgeted production (units)	48000	54000	58000	160000
Materials requirements per unit	3	3	3	3
Materials needed for production (cc)	144000	162000	174000	480000
Budgeted ending inventory (cc.)	81000	87000	60000*	60000
Total materials requirements (cc.)	225000	249000	234000	540000
Beginning inventory (cc.)	72000	81000	87000	72000
Materials to be purchased (cc.)	153000	168000	147000	468000

*40000 x 3 x 50%