Question

Greener Grass Fertilizer Company plans to sell 300,000 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 75 percent of the next month’s estimated sales. There are 225,000 finished units in inventory on June 30. Each unit of finished product requires 5 pounds of raw material at a cost of $1.55 per pound. There are 800,000 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

1)

	July	August	September	Total
Desired Unit sales	300000	300000(1+.05)= 315000	315000(1+.05)= 330750
Add:Desired ending finished goods inventory	315000*75%=236250	330750*75%= 248062.5	347287.5*75%= 260465.63
Less:Beginning inventory	-225000	-236250	-248062.5
Units to produce	311250	326812.5 (rounded to 326813)	343153.13 (rounded to 343153)	981216

#Unit sales in October = 330750 (1+.05)= 347287.5

2)

Units To produce	780000
Material requirement per unit	5
Total material required for production		3900000   (780000*5)
Add:Desired ending raw material inventory		3900000*25%= 975000
Less:Beginning inventory		-800000
Raw material to purchase (pounds)		4075000
cost per pound		1.55
Total cost of purchase		4075000*1.55=6316250