Question

Micro Products Inc. has developed a very powerful electronic calculator. Each calculator requires three small chips that cost $3 each and are purchased from an overseas supplier. Micro Products has prepared a production budget for the calculator by quarters for year 2 and for the first quarter of year 3, as shown below:

	Year 2					Year 3
	First	Second	Third	Fourth		First
Budgeted production, in calculators	71,000	101,000	161,000	111,000		91,000

    The chip used in production of the calculator is sometimes hard to get, so it is necessary to carry large inventories as a precaution against stock-outs. For this reason, the inventory of chips at the end of a quarter must be equal to 20% of the following quarter’s production needs. A total of 47,000 chips will be on hand to start the first quarter of year 2.

Required:
Prepare a direct materials purchases budget for chips, by quarter and in total, for year 2. At the bottom of your budget, show the dollar amount of purchases for each quarter and for the year in total.

Micro Products, Inc. Direct Materials Budget - Year 2 Quarter First Second Third Fourth Year Required production in calculators Number of chips per calculator Production needs-chips Deduct: Beginning inventory Total needs Add: Ending inventory Required purchases—chips Total cost of purchases 0 0 0 0 0

Answer 1

	First	Second	Third	Fourth	Year
Required production	71,000	101,000	161,000	111,000	444,000
Number of chips per calculator	3	3	3	3	3
Production needs- Chips	213,000	303,000	483,000	333,000	1,332,000
Add: Ending Inventory	60,600	96,600	66,600	54,600	54,600
Total Needs	273,600	399,600	549,600	387,600	1,386,600
Deduct: Beginning Inventory	47,000	60,600	96,600	66,600	47,000
Required Purchases	226,600	339,000	453,000	321,000	1,339,600
Total cost	679,800	1,017,000	1,359,000	963,000	4,018,800

A B C D E F 1 3 2 First Second Third Fourth Year 3 Required production 71000 101000 161000 111000 =SUM(B3:E3) 91000 4. Number of chips per calculator 3 5 Production needs- Chips =B3*B4 =C3*C4 =D3*D4 =E3*E4 =F3*F4 6 Add: Ending Inventory =C5*20% =D5*20% =E5*20% =G3*3*20% =E6 7 Total Needs =B5+B6 =C5+C6 =D5+D6 =E5+E6 =F5+F6 8 Deduct: Beginning Inventory 47000 =B6 =C6 =D6 =B8 9 Required Purchases =B7-B8 =C7-C8 =D7-D8 |=E7-E8 =F7-F8 10 Total cost =B9*3 =C9*3 =D9*3 =E9*3 =F9*3 11