Teletub Toys Ltd manufactures and distributes a popular children's' character to toy retailers. This product requires three kilograms of material to manufacture one unit. The company is currently planning raw materials needs for the fourth quarter of the year (October, November and December). Peak sales typically occur in December.
Teletub Toys has the following inventory requirements:
• Finished goods inventory at the end of each month must be equal to 5,000 units plus 30% of next month's sales.
• Finished goods inventory on September 30 is budgeted to be 17,000 units.
• Raw materials inventory on hand at the end of each month must be equal to one-half of the following month's production needs for raw materials.
• The raw materials inventory on September 30 is budgeted to be 64,500 kgs.
• The company maintains no work in progress inventories.
The sales budget for Teletub Toys is shown below:
Month Budgeted Sales (units)
September 20,000
October 40,000
November 50,000
December 70,000
January 35,000
February 20,000
March 10,000
Required
1. Prepare a production budget for October, November and December.
2. Prepare a raw materials budget for October, November and December.
3. Explain why the company plans to produce more units than it sells in October and November and fewer units than it sells in December.