Pearl Products Limited of Shenzhen, China, manufactures and distributes toys thr
ID: 3146258 • Letter: P
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: The finished goods inventory on hand at the end of each month must equal 4,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 11,800 units. 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 60,000 cc of solvent H300. 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 39,000 August 44,000 September 54,000 October 34,000 November 24,000 December 14,000 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.
Explanation / Answer
Finished good inventory on hand at the end of each month must equal 4,000 units of Supermix + 20% of the next month sale.
Inventory on Jun 30 = 11,800 units
Required inventory = 4,000 + 0.2 * 39,000
= 11,800 units
Inventory on July 31 = 4,000 + 0.2 * 44,000
= 12,800 units
We must produce 1,000 units more than budgeted sale in July to meet our inventory requirment for August.
Production in July = 39,000 + 1,000
= 40,000 units
Similarly,
Required inventory on August 31 = 4,000 + 0.2 * 54,000
= 14,800 units
Differece in inventory = 14,800 - 12,800
= 2,000 units
We must produce 2,000 units more than budgeted sale in August
Production in August = 44,000 + 2,000
= 46,000 units
Now,
Required inventory on September 30 = 4,000 + 0.2 * 34,000
10,800 units
Difference in inventories = 10,800 - 14,800
- 4,000 units
Minus sign denotes that we need to produce 4,000 units less in September than the budgeted sale because we have access inventory of 4,000 units
Production in September = 54,000 - 4,000
50,000 units
Again ,
Required inventory on October 31 = 4,000 + 0.2 * 24,000
= 8,800 units
Difference = 8,800 - 10,800
= - 2,000 units
Production in October = 34,000 - 2,000
32,000 units
Now, for raw material
In July, production = 40,000 units
So, we need 3*40,000 cc raw material
On Jun 30, raw material inventory = 60,000 cc
Need of raw material in August = 3 * 46,000
= 1,38,000 cc
Required inventory on July 31 = 1,38,000 / 2
= 69,000 cc
We have 60,000 cc on June 30
That means we need 9,000 cc more
In July we must purchase 9,000 cc more than required raw material
That is = 1,20,000 + 9,000
= 1,29,000 cc
Similarly,
Need of raw material in September = 3 * 50,000
= 1,50,000 cc
Required inventory on August 31 = 1,50,000 / 2
= 75,000 cc
Differnece in required inventory = 75,000 - 69,000
= 6,000 cc
We need to purchase 6,000 cc more in August than required
That is = 3 * 46,000 + 6,000
= 1,44,000 cc
Again,
Need of raw material in October = 3 * 32,000
= 96,000 cc
Required inventory on September 30 = 96,000 / 2
= 48,000 cc
Differnce in required inventory = 48,000 - 75,000
= - 27,000 cc
We need to purchase 27,000 less in September to produce 50,000 units
Raw material to be purchased in September = 3* 50,000 - 27,000
1,23,000 cc
Total in a quarter = 1,29,000 + 1,44,000 + 1,23,000
= 3,96,000 cc
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