Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East 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:

1. The finished goods inventory on hand at the end of each month must equal 4,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 14,200 units.

2. 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 78,000 cc of solvent H300.

3. The company maintains no work in process inventories.

A monthly sales budget for Supermix for the third and fourth quarters of the year follows.

	Budgeted Unit Sales
July	51,000
August	56,000
September	66,000
October	46,000
November	36,000
December	26,000

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

Production Budget
	July	August	September	Quarter	October
Sales units	51000	56000	66000	173000	46000
Add : Desired Ending Inventory	15200	17200	13200	13200	13800
Total Goods Required	66200	73200	79200	186200	59800
Less : Beginning Inventory	14200	15200	17200	14200	13200
Production Required	52000	58000	62000	172000	46600
Direct Material Budget
	July	August	September	Quarter	October
Units to be produced	52000	58000	62000	172000	46600
Raw Material Per unit	3	3	3	3	3
Raw Material for Production	156000	174000	186000	516000	139800
Add : Desired Ending Inventory	87000	93000	69900	69900
Total Material Required	243000	267000	255900	585900
Less : Beginning Inventory	78000	87000	93000	78000
Material to be purchased	165000	180000	162900	507900