Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout Southeast 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 2,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 20,250 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 111,375 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	73,000
August	78,000
September	88,000
October	68,000
November	58,000
December	48,000

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	October
Budgeted Sales	73,000	78,000	88,000	68,000
Add: Desired Ending Inventory	21,500	24,000	19,000	16,500
Total Required	94,500	102,000	107,000	84,500
Less: Beginning Inventory	20,250	21,500	24,000	19,000
Budgeted Production	74,250	80,500	83,000	65,500

Direct Material Budget

	July	August	September	Quarter
Budgeted Production	74,250	80,500	83,000	237,750
H300 required per unit	3	3	3	3
Raw material required	222,750	241,500	249,000	713,250
Add: Desired Ending Inventory	120,750	124,500	98,250	343,500
Total Required	343,500	366,000	347,250	1,056,750
Less: Beginning Inventory	111,375	120,750	124,500	356,625
Purchases	232,125	245,250	222,750	700,125