3. Marple Company\'s budgeted production in units and budgeted raw materials pur

Question

3. Marple Company's budgeted production in units and budgeted raw materials purchases over the next three months are given below:
January February March
Budgeted production (in units) 60,000 ? 100,000
Budgeted raw materials purchases (in pounds) 129,000 165,000 188,000

Two pounds of raw materials are required to produce one unit of product. The company wants raw materials on hand at the end of each month equal to 30% of the following month's production needs. The company is expected to have 36,000 pounds of raw materials on hand on January 1. Budgeted production for February should be:

A) 105,000 units.
B) 82,500 units.
C) 150,000 units.
D) 75,000 units.

Explanation / Answer

First, we have to find out how much of the raw material purchases are actually for January.

Because there are 36,000 lbs in January 1 (meaning they are left over from December to be used in January production), you will need to calculate how many more pounds of raw material you need to meet the 60,000 budgeted unit production.

60,000 * 2/pounds per unit = 120,000 pounds necessary.

You already have 36,000 pounds from December, so you need to buy

120,000 - 36,000 = 84,000 pounds to meet January's budgeted production.

But note that we have purchased 129,000 pounds in January. Because it is company policy that your ending raw materials inventory at the end of each month is equal to 30% of next month's budgeted production needs, we can now solve for February's budgeted production in units.

129,000 - 84,000 = 45,000 (this is your ending raw materials inventory for January)

Since this is 30% of what you will be needing next month,

45,000 / 30% = 150,000 (this is how much you will need to produce February's budgeted production in POUNDS)

Because each unit takes two pounds, we simply divide this value by 2.

150,000 / 2 = 75,000 units.

So the answer is D.

Hope that helps. :)

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