Scotch Company plans to sell 400,000 units of finished product in July 20x1. Management (1) anticipates a growth rate in sales of 5% per month thereafter and (2) desires a monthly ending finished-goods inventory (in units) of 80% of the following month's estimated sales. There are 300,000 completed units in the June 30, 20x1 inventory.
Each unit of finished product requires four pounds of direct material at a cost of $1.50 per pound. There are 1,600,000 pounds of direct material in inventory on June 30, 20x1.
Required:
A. Prepare a production budget for the quarter ended September 30, 20x1. Note: For both part "A" and part "B" of this problem, prepare your budget on a quarterly (not monthly) basis.
B. Independent of your answer to part "A," assume that Scotch plans to produce 1,200,000 units of finished product for the quarter ended September 30. If the firm desires to stock direct materials at the end of this period equal to 25% of current production usage, compute the cost of direct material purchases for the quarter.