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Greener Grass Fertilizer Company plans to sell 220,000 units of finished product in July and anticipates a growth rate in sales of 6 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 165,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of raw material at a cost of $1.35 per pound. There are 720,000 pounds of raw material in inventory on June 30.Independent of your answer to requirement (1), assume the company plans to produce 600,000 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

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Answer:

1.

In July:

units to be produced:

= Unit sales + Ending inventory desired - Beginning inventory

= 220,000 + 233,200(0.75) - 165,000

= 220,000 + 174,900 - 165,000

= 229,900

In August:

Units to be produced:

= Unit sales + Ending inventory desired - Beginning inventory

= 220,000(1 + 0.06) + 247,192(0.75) - 174,900

= 233,200 + 185,394 - 174,900

= 243,694

In September:

units to be produced:

= Unit sales + Ending inventory desired - Beginning inventory

= 233,200(1 + 0.06) + 262,023.52(0.75) - 185,394

= 247,192 + 196,517.64 - 185,394

= 258,315

In October:

Unit sales = 247,192(1 + 0.06)

                = 262,023.52

Company’s total required production in units of finished product for the entire three-month period ending September 30:

= 229,900 + 243,694 + 258,315

= 731,909

2.

Material consumed during the year:

= [Units produced  × material consumption]

= 600,000 × 4

= 2,400,000

Ending inventory of raw material desired = 2,400,000 × 0.25

                                                                    = $ 600,000

Raw material purchase:

= material consumed + ending - beginning

= 2,400,000 + 600,000 - 720,000

= 2,280,000 pounds

Cost of raw material purchase = purchase  × rate per pound

                                                     = 2,280,000 × 1.35

                                                    = $3,078,000

Tundexi

The total required production in units is 731,909 units and the cost of raw material purchase is $3,078,000.

In July

Units to be produced = Unit sales + Ending inventory desired - Beginning inventory

Units to be produced = 220,000 + 233,200(0.75) - 165,000

Units to be produced = 220,000 + 174,900 - 165,000

Units to be produced = 229,900

In August

Units to be produced = Unit sales + Ending inventory desired - Beginning inventory

Units to be produced = 220,000(1 + 0.06) + 247,192(0.75) - 174,900

Units to be produced = 233,200 + 185,394 - 174,900

Units to be produced = 243,694

In September

Units to be produced = Unit sales + Ending inventory desired - Beginning inventory

Units to be produced = 233,200(1 + 0.06) + 262,023.52(0.75) - 185,394

Units to be produced = 247,192 + 196,517.64 - 185,394

Units to be produced = 258,315

In October

Unit sales = 247,192(1 + 0.06)

Unit sales = 262,023.52

Total required production in units = 229,900 + 243,694 + 258,315

Total required production in units = 731,909 units

Material consumed during the year = [Units produced  × material consumption]

Material consumed during the year = 600,000 × 4

Material consumed during the year = 2,400,000

Ending inventory of raw material desired = 2,400,000 × 0.25

Ending inventory of raw material desired = $ 600,000

Raw material purchase = Material consumed + Ending - Beginning

Raw material purchase = 2,400,000 + 600,000 - 720,000

Raw material purchase = 2,280,000 pounds

Cost of raw material purchase = purchase  × rate per pound

Cost of raw material purchase = 2,280,000 × 1.35

Cost of raw material purchase = $3,078,000

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