Niagra Chemical Company produces three products using three different continuous

Question

Niagra Chemical Company produces three products using three different continuous processes. The products are Yarex, Darol, and Norex.

Projected sales in gallons for the three products for the years 20x2 and 20x3 are as follows:

20x2 20x3

Yarex 120,000 130,000

Darol 80,000 70,000

Norex 50,000 60,000

• Because of the continuous nature of Niagra’s processes, work-in-process inventory for each of the products remains constant throughout the year.

• Inventories are planned for each product so that the projected finished-goods inventory at the beginning of each year is equal to 8 percent of that year’s projected sales.

• The conversion requirements in hours per gallon for the three products are Yarex, 0.07 hours; Darol, 0.10 hours; and Norex, 0.16 hours. The conversion cost of $20 per hour is considered 100 percent variable.

• The raw-material requirements of the three products are shown in the following chart.

Raw Material Units Unit Price Yarex Darol Norex

Gamma pounds $ 8 0.2 0.4 —

Murad pounds $ 6 0.4 — 0.5

Islin gallons $ 5 1.0 0.7 0.5

Tarden gallons $ 10 — 0.3 0.5

• Raw-material inventories are planned so that each raw material’s projected inventory at the beginning of a year is equal to 10 percent of the previous year’s usage of that raw material.

Required:

1. Determine Niagra Chemical Company’s production budget (in gallons) for the three products for 20x2.

2. Determine Niagra Chemical Company’s conversion cost budget for 20x2.

3. Assuming the 20x1 usage of Islin is 200,000 gallons, determine the company’s raw-material purchases budget (in dollars) for Islin for 20x2.

4-a. Assume that for 20x2 production, Niagra Chemical Company could replace the raw material Islin with the raw material Philin. The usage of Philin would be the same as the usage of Islin. However, Philin would cost 20 percent more than Islin and would cut production times on all three products by 10 percent. Compare cost of using Philin over using Islin.

4-b. Which raw material should the management use for the 20x2 production? Islin Philin

Explanation / Answer

Ans 1Production Budget Yarex Darol Norex Yarex Darol Norex Sales 120000 80000 50000 Calculation of ending imnntory Add: Ending Inventory (.08*20X3 sales) 10400 5600 4800 130000*0.08 70000*0.08 60000*0.08 Total required finished goods 130400 85600 54800 Less: beginning Inventory (.08*20X2 sales) 9600 6400 4000 Totalproduction in 20X2 120800 79200 50800 Ans 2 Convesrion cost Yarex Darol Norex Total Conversion hours required 0.07 0.1 0.16 Totalproduction in 20X2 120800 79200 50800 Total hours 8456 7920 8128 24504 Conversion cost budget $20*24504 490080 Ans 3 Raw material used per gallon A 1 0.7 0.5 Totalproduction in 20X2 120800 79200 50800 Raw material used in production A*B 120800 55440 25400 201640 Add: Desired Inventory (201640*10%) 20164 Less: beginning Inventory (200000*.1) 20000 Required purchases 201804 Purchase Budget $5*201804 1009020 Ans 4a Change in material cost 20X2 production requirement PHIlin (201640*5*1.2) 1209840 Islin (201640*5) 1008200 Increase in cot of raw material 201640 Change in conversion cost n=by subsituting Philin 24504 hours*20*.9 441072 Islin 24504 hours*20* 490080 Decrease in convesrion cost -49008 Net Increase in production cost 152632 Ans 4b Should not subsitute Islin from Philin. Islin should be continued Islin

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