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 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 21,250 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 105,375 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	69,000
August	74,000
September	84,000
October	64,000
November	54,000
December	44,000

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

Solution

Pearl Products Limited
Production budget
	July	August	September	October
Units to be sold	69000	74000	84000	64000
Desired Ending Finished Inventory	22500	25000	20000	17500*
Total Units needed	91500	99000	104000	81500
Less : Beginning Finished Inventory	21250	22500	25000	20000
Units to be Produced	70250	76500	79000	61500

*4000 plus 25% of November units sold

Pearl Products Limited
Direct Materials Budget
for the month of------
	July	August	September	Third Quarter
Budgeted production (units)	70250	76500	79000	225750
Materials requirements per unit	3	3	3	3
Materials needed for production (cc)	210750	229500	237000	677250
Budgeted ending inventory (cc.)	114750	118500	92250*	92250
Total materials requirements (cc.)	325500	348000	329250	769500
Beginning inventory (cc.)	105375	114750	118500	105375
Materials to be purchased (cc.)	220125	233250	210750	664125

*(61500 x 3) x 50%...........61500 being October budgeted production units