Problem: Micro Products, Inc., has developed a very powerful electronic calculator. Each calculator requires four small "chips" that cost $2 each and are purchased from an overseas supplier. Micro Products has prepared a production budget for the calculator by quarters for Year 2 and for the first quarter of Year 3, as shown below:
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Year 2
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Year 3
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First
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Second
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Third
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Fourth
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First
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Budgeted production, in calculators
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60,000
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85,000
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144,000
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94,000
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70,000
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The chip used in production of the calculator is sometimes hard to get, so it is necessary to carry large inventories as a precaution against stock outs. For this reason, the inventory of chips at the end of a quarter must be equal to 20% of the following quarter's production needs. Some 48,000 chips will be on hand to start the first quarter of Year 2.
Required:
Prepare a direct materials budget for chips, by quarter and in total, for Year 2. At the bottom of your budget, show the dollar amount of purchases for each and for the year in total.
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Year 2
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First
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Second
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Third
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Fourth
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Year
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Production needs - chips
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Add: Desired ending inventory-chips
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Total needs - chips
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Less: Beginning inventory-chips
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Required purchases - chips
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Cost of purchases
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