Question

Exercise 9-25 Budgeting Production and Raw-Material Purchases (LO 9-3, 9-6) Greener Grass Fertilizer Company plans to sell 280,000 units of finished product in July and anticipates a growth rate sales of 4 percent per month. The desired monthly ending inventory in units of finished product is 70 percent of the next month's estimated sales. There are 196,000 finished units in inventory on June 30. Each unit of finished product requires 6 pounds of raw material at a cost of $2.15 per pound. There are 710,000 pounds of raw material in inventory on June 30. Required: 1. Compute the company's total required production in units of finished product for the entire three-month period ending September 30. (Round all intermediate calculations and your final answer to the nearest unit.) 2. Independent of your answer to requirement 1, assume the company plans to produce 680,000 units of finished product in the three-month period ending September 30, and to have raw material inventory on hand at the end of the three-month period equal to 25 percent of the use in that period. Compute the total estimated cost of raw-material purchases for the entire three-month period ending September 30. Total required production 1 in units 2. Total estimated cost

Answer 1

Sales budget:

	July	August	September
Unit sales	280,000	280,000*1.04 = 291,200	291,200*1.04 = 302,848

1. Total required production in units = Unit Sales of July, August and September+ Desired Ending Inventory of september- Beginning Inventory of July

280,000+291,200+302,848+(302,848*1.04*70%)-196.000 = 898,522 Units

2. Material consumed during the year= [Units produced × material consumption]

= 680,000*6

= 4,080,000

Ending inventory of raw material desired = 4,080,000* 0.25

                                                                    = 1,020,000

Raw material purchase:

= material consumed + ending inventory- beginning inventory

=4,080,000 + 1,020,000 - 710,000

= 4,390,000 pounds

Cost of raw material purchase = Raw material purchase × rate per pound

                                                     =4,390,000 × 2.15

                                                    = $9,438,500