Question

Greener Grass Fertilizer Company plans to sell 220,000 units of finished product in July and anticipates a growth rate in sales of 5 percent per month. The desired monthly ending inventory in units of finished product is 85 percent of the next month’s estimated sales. There are 187,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of raw material at a cost of $1.65 per pound. There are 750,000 pounds of raw material in inventory on June 30.

Required:

1. Compute the company’s total required production in units of finished product for the entire three-month period ending September 30. (Round all intermediate calculations and your final answer to the nearest unit.)

2. Independent of your answer to requirement (1), assume the company plans to produce 780,000 units of finished product in the three-month period ending September 30, and to have raw-material inventory on hand at the end of the three-month period equal to 25 percent of the use in that period. Compute the total estimated cost of raw-material purchases for the entire three-month period ending September 30.

Answer 1

Solution:

1.)

	July	August	September	Total
Sales	220,000	231,000(220,000 × 1.05)	242,550 (220,000 × 1.05)	693,550
Desired ending inventory	196,350 (231,000 × 85%)	206,168 (242550 × 85%)	216,476 (242,550 × 1.05 × 85%)	216,476
Total units required	416,350	437,168	459,026	910,026
Less: Beginning inventory	-187,000	-196,350	-206,168	187,000
	,
Total units to be produced	229,350	240,818	252,858	723,026

Thus, the answer is 723,026.

2.)

Total estimated cost of raw materials purchases = raw materials purchases × cost per pound

= (desired ending inventory + required production - beginning inventory) × cost per pound

= ((780,000 × 4 × 25%) +(780,000 × 4) -(750,000) × $1.65

= 780,000 × 3,120,000 - 750,000 × $1.65

= 3150000 × $1.65

= $5,197,500

Thus, the answer is $5 197,500.

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