Question

Complete the Modeling:
a.  Sales Budget				Quarter Ended December 31, 2013
			September	October	November	December	Total		January	February
		Expected sales in units:	13,000	12,000	14,000	20,000	46,000		9,000	10,000
		Selling price per unit:	$60	$60	$60	$60	$60
		Total Sales:	$780,000	$720,000	$840,000	$1,200,000	$2,760,000
b.  Cash Collections from:				Quarter Ended December 31, 2013
		Sales	% Collected	October	November	December	Total
	September sales:	$780,000	64% Collected	$499,200			$499,200
	October sales:	$720,000	32% Collected	230,400			230,400
	October sales:	$720,000	32% Collected		460,800		460,800
	November sales:	$840,000	0% Collected		268,800		268,800
	November sales:	$840,000	0% Collected			537,600	537,600
	December sales:	$1,200,000	0% Collected			384,000	384,000
		Total cash collections:		$729,600	$729,600	$921,600	$2,380,800
c.  Production Budget				Quarter Ended December 31, 2013
	Finished Goods		% Budgeted	October	November	December	Total		January
		Beginning Inventory:		4,800	5,600	8,000	4,800		3,600
		Units to be produced:		12,800	16,400	15,600	44,800		9,400
		Goods available for sale:		17,600	22,000	23,600	49,600		13,000
		Desired ending inventory:	40% Budgeted	5,600	8,000	3,600	3,600		4,000
		Quantity of goods sold:		12,000	14,000	20,000	46,000		9,000
d.  Materials Purchases Budget				October	November	December	Total		January
		Units to be produced:		12,800	16,400	15,600	44,800		9,400
		Pounds required for each unit:	5
		Total pounds used in production:		64,000	82,000	78,000	224,000		47,000
				Quarter Ended December 31, 2013
	Raw Materials		% Budgeted	October	November	December	Total
		Beginning Inventory:		19,200	24,600	23,400	19,200
		Purchases of materials:		69,400	80,800	68,700	218,900
		Materials available for use:		88,600	105,400	92,100	238,100
		Desired ending inventory:	30% Budgeted	24,600	23,400	14,100	14,100
		Total pounds used in production:		64,000	82,000	78,000	224,000
e.  Cash Payments for:				October	November	December	Total
		Purchases of materials:		69,400	80,800	68,700	218,900
		Cost per pound of raw material:	$4.00
		Total cost of raw material purchases:		$277,600	$323,200	$192,360	$869,120
				Quarter Ended December 31, 2013
		Purchases	% Paid	October	November	December	Total
	September Net A/P:			$75,960			$75,960
	October purchases:	$277,600	70% Paid	194,320			194,320
	October purchases:	$277,600	70% Paid		83,280		83,280
	November purchases:	$323,200	0% Paid		226,240		226,240
	November purchases:	$323,200	0% Paid			96,960	96,960
	December purchases:	$192,360	0% Paid			192,360	192,360
		Total cash payments:		$270,280	$309,520	$289,320	$869,120

The purchasing manager is evaluating an alternative supplier that would provide a slightly lower grade of raw
material at a savings from the current price of $4 per pound.  The new price would be at $3.50 per pound but
the product would now require six pounds of the lower grade of raw material to produce the same number of
good finished units as currently achieved.  Would you recommend the change to the new supplier?  What if the
new price was to be $3.00?  How about a price of $3.285307?  Explain your answers.

Answer 1

Yes, the change to new supplies is recommended if cost of material is $3.5 as there will be savings in cost of purchases.

If cost of raw material is $3.5 then the following changes will take place :
Budgeted Purchases will change	Increase in purchase material
Cost of raw material will change	Decrease in cost
Quarter Ended December 31, 2013
Materials Purchases Budget		October	November	December	Total
Units to be produced:		12,800	16,400	15,600	44,800
Pounds required for each unit:	6
Total pounds used in production:		76,800	98,400	93,600	2,68,800
Quarter Ended December 31, 2013
Raw Materials	% Budgeted	October	November	December	Total
Total pounds used in production:		64,000	82,000	78,000	2,24,000
Desired ending inventory:	30% Budgeted	29,520	28,080	0	0
Materials available for use:		93,520	1,10,080	78,000	2,24,000
Beginning Inventory:		19,200	29,520	28,080	19,200
Purchases of materials:		74,320	80,560	49,920	2,04,800
Quarter Ended December 31, 2013
e.  Cash Payments for:		October	November	December	Total
Purchases of materials:		74,320	80,560	49,920	2,04,800
Cost per pound of raw material:	$           3.50
Total cost of raw material purchases:		$2,60,120.00	$2,81,960.00	$1,74,720.00	$7,16,800.00

If the new price is $3.00 then also new suplier is recommended as purchase cost of material is less than $4 as earlier charged.

Quarter Ended December 31, 2013
e. Cash Payments for:		October	November	December	Total
Purchases of materials:		74,320	80,560	49,920	2,04,800
Cost per pound of raw material:	$           3.00
Total cost of raw material purchases:		$2,22,960.00	$2,41,680.00	$1,49,760.00	$6,14,400.00

If the new price is $3.285307 then also new suplier is recommended as purchase cost of material is less than $4 as earlier charged.

Quarter Ended December 31, 2013
e.  Cash Payments for:		October	November	December	Total
Purchases of materials:		74,320	80,560	49,920	2,04,800
Cost per pound of raw material:	$ 3.285307
Total cost of raw material purchases:		$2,44,164.02	$2,64,664.33	$1,64,002.53	$6,72,830.87

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