Question - Pearl Products Limited of Sarnia, Ontario, manufactures and distributes toys throughout central Canada. Three cubic centimetres (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company's products. The company expects to pay $0.25 per cc of H300 to its suppliers. The company is now planning its 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:
a. The finished goods inventory on hand at the end of each month must be equal to 3,000 units Supermix plus 20% of next month's sales. The finished goods inventory on June 30 is budgeted to be 10,000 units.
b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month's raw materials requirements. The raw materials inventory on June 30 is budgeted to be 54,000 cc of solvent H300.
c. The company maintains no goods in process inventories.
Estimated sales for July to December are as follows: Month
|
Month
|
Budgeted Sales (units)
|
|
July
|
35,000
|
|
August
|
40,000
|
|
September
|
50,000
|
|
October
|
30,000
|
|
November
|
20,000
|
|
December
|
10,000
|
REQUIRED: Preparation component
1. Prepare a production budget for Supermix for July to October.
2. Prepare a budget showing the quantity of solvent H300 to be purchased in July, August, and September, and for the quarter in total.
Analysis component
3. Examine the production budget you prepared above. Why will the company produce more units than it sells in July and August, and fewer units than it sells in September and October?