Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout Southeast 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: a. The finished goods inventory on hand at the end of each month must equal 2,000 units of Supermix plus 25% of the next month's sales. The finished goods inventory on June 30 is budgeted to be 17,250 units. b. 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 93,375 cc of solvent H300. c. The company maintains no work in process inventories. A monthly sales budget for Supermix for the third and fourth quarters of the year follows. July August September October November December Budgeted Unit Sales 61,000 66,000 76,000 56,000 46,000 36,000 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

1)

Pearl Products Limited
Production Budget
	July	August	September	October
Budgeted unit sales	61000	66000	76000	56000
Add: Desired ending inventory	18500	21000	16000	13500
Total needs	79500	87000	92000	69500
Less: Beginning inventory	(17250)	(18500)	(21000)	(16000)
Required production in units	62250	68500	71000	53500

Calculation of Desired ending inventory

July= 66000*25%+2000= 18500

August= 76000*25%+2000= 21000

September= 56000*25%+2000= 16000

October= 46000*25%+2000= 13500

3)

Pearl Products Limited
Direct Materials Budget
	July		August		September		Third Quarter
Required production in units	62250		68500		71000		201750
Units of raw materials needed per unit of finished goods	3	cc	3	cc	3	cc	3	cc
Units of raw materials needed to meet production	(62250*3)= 186750		(68500*3)= 205500		(71000*3)= 213000		605250
Add; Desired units of ending raw materials inventory	102750		106500		80250		80250
Total units of raw materials needed	289500		312000		293250		685500
Less: Beginning units of raw materials inventory	(93375)		(102750)		(106500)		(93375)
Units of raw materials to be purchased	196125		209250		186750		592125

Total of Third Quarter= 62250+68500+71000= 201750

Calculation of Desired units of ending raw materials inventory

July= 205500*1/2= 102750

August= 213000*1/2= 106500

September= 53500*3*1/2= 80250