Question

Micro Products Inc. has developed a very powerful electronic calculator. Each calculator requires three small chips that cost $4 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	77,000	107,000	167,000	117,000		97,000

    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 53,000 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.

Answer 1

Direct materials Purchases budget

	First	Second	Third	Fourth	Quarter
Budgeted production of calculators	77,000	107,000	167,000	117,000	468,000
No of chips per calculator	3	3	3	3	3
Required Purchases	231,000	321,000	501,000	351,000	1,404,000
Add: Ending inventory	(321,000×20%) =64,200	(501,000×20%) =100,200	(351,000×20%) =70,200	(97,000×3×20%) =58,200	292,800
Total needs	295,200	421,200	571,200	409,200	1,696,800
Less: Beginning Inventory	(53,000)	(64,200)	(100,200)	(70,200)	(287,600)
Required Purchases	242,200	357,000	471,000	339,000	1,409,200
Per calculator	$4	$4	$4	$4	$4
Total calculator Purchases	$968,800	$1,428,000	$1,884,000	$1,356,000	$5,636,800

______×______

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