San Fernando Fertilizer Company plans to sell 40,000 units of finished product i

Question

San Fernando Fertilizer Company plans to sell 40,000 units of finished product in July and anticipates a growth rate in sales of 5 percent per month. The desired monthly ending inventory in units of finished product is 80 pecent of the next month's estimated sales. THere are 32,000 finished units in inventory on June 30. Each unit of finished product requires four pounds of raw material at a cost of $1.40 per pound. There are 140,000 pounds of raw material in inventory on June 30.

Required:
1. Compute the company's total requried production in units of finished product for the entire three-month period ending Sep 30.
2. Independent of your answer to requirement 1, assume the company plans to produce 120,000 units of finished product in the three-month period ending Sep 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 estimnated cost of raw-material purchases for the entire three-month period ending September 30.

Explanation / Answer

1. Production Budget July Aug Sept Sales in units 40000 40000x1.05 40000x1.05x1.05 +Desired EI 40000x1.05x0.8 40000x1.05x1.05x0.8 40000x1.05x1.05x1.05x0.8 =Total needs 73600 77280 81144 - BI 32000 40000x1.05x0.8 40000x1.05x1.05x0.8 =Production needs 41600 43680 45864 total requried production in units of finished product for the entire three-month period ending Sep 30 = 41600 + 43680 + 45864 = 131144 2. Direct Materials Purchases Budget Units to be produced 120000 xRaw materials per unit (pds) 4 =Production needs 480000 +Desired EI 480000x0.25=120000 =Total needs 600000 -BI 140000 =Raw materials to be purchased 460000 xCost per pound $1.40 =Total purchase cost $644000

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