Question

San Fernando Fertilizer Company plans to sell 230,000 units of finished product in July and anticipates a growth rate in sales of 5 percent per month. The desired monthly ending inventory in units of finished product is 75 percent of the next month's estimated sales. There are 172,500 finished units in inventory on June 30. Each unit of finished product requires 6 pounds of raw material at a cost of $1.35 per pound. There are 740,000 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. (Do not round intermediate calculations. Round your final answer to the nearest unit.)

        

2.

Independent of your answer to requirement (1), assume the company plans to produce 660,000 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.

  

Answer 1

1.

Production Budget

	July	August	September
Sales (units)	230,000	241,500	253,575
+ Ending inventory of Finished Goods	181,125	190,181	199,690
Total finished goods inventory needed	411,125	431,681	453,265
-Beginning inventory of Finished Goods	- 172,500	- 181,125	- 190,181
Production units	238,625	250,556	263,084

Raw material procurement budget

Raw material consumed (Production x raw material per unit of finished goods) (660,000 x 6)	3,960,000
+ Ending inventory of raw material (3,960,000 x 25%)	990,000
Total units of raw material needed	4,950,000
- Beginning inventory of raw material	- 740,000
Raw material purchase	4,210,000

Cost of raw material purchases = Raw material purchase x Cost per pound

= 4,210,000 x 1.35

= $5,683,500

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