Question

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A company has prepared a production budget for the upcoming quarter as follows: April May June Finished Units 15,789 15,294 1 5,652 4 pounds of raw material are required to make 1 finished unit. The company desires an ending raw materials inventory for each month equal to 22% of the following months production (in units of raw material). How many pounds of raw material should be purchased in May? Round your answer to the nearest whole number. Don't round any intermediate calculations.

Answer 1

1)
	April	May	June
Units to be produced	15,789	15,294	15,652
Direct materials per unit	$4	$4	$4
Total pounds needed for production	63,156	61,176	62,608
Desired ending direct materials (22% of following month Production)	13,458.72 (61,176 x 22%)	13,773.76 (62,608 x 22%)
Total required		74,949.76
Less: Beginning direct materials		(13,458.72)
Raw Material purchased in May		61,491.04
Raw Material purchased in May (Rounded off)		61,491 pounds
2)
Option 1
Incremental profit    = Sales revenue (-) Cost of Production (-) Cost of rework    =   ($22.23 x 422 ) (-)   $5,896   (-) (422 x $1.87) =     $9,381.06 (-) $5,896 (-) $789.14 =       $2,695.92
Incremental profit for Option - 1    = $2,695.92
Option 2
Incremental profit      = Sales revenue (-) Cost of Production      =   ($18.77 x 422 ) (-) $5,896      =    $7,920.94 (-) $5,896      =      $2,024.94
Incremental profit for Option - 2   = $2,024.94
Change in Profits              =   $2,695.92 (-) $2,024.94              =   $670.98
Difference in Incremental profit = $670.98