Greener Grass Fertilizer Company plans to sell 280,000 units of finished product

Question

Greener Grass Fertilizer Company plans to sell 280,000 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 75 percent of the next month's estimated sales. There are 210,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of raw material at a cost of $1.65 per pound. There are 760,000 pounds of raw material in inventory on June 30 Required: 1. Compute the company's total required production in units of finished product for the entire three-month period ending September 30. (Round all intermediate calculations and your final answer to the nearest unit.) 2. Independent of your answer to requirement (1), assume the company plans to produce 640,000 units of finished product in the three-month period ending September 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 estimated cost of raw-material purchases for the entire three- month period ending September 30 1. Total required production in units 2. Total estimated cost

Explanation / Answer

Solution: 1. Total required production in units 915,801 2. Total estimated cost 4,026,000 Working Notes: July August September October Sales (units) 280,000 294,000 308,700 324,135 [sales increased @5%] [280,000 x 1.05] [294000 x 1.05 ] [308,700 x 1.05 ] Add: Ending inventory 220,500 231,525 243,101 [75% of next month sales] [294,000 x 75%] [308,700 x 75%] [324,135 x 75% ] Less: Beginning Inventory 210,000 220,500 231,525 [given] [Ending bal. of July] [Ending bal. of August] Units to be produced 290,500 305,025 320,276 Total required production in units =290,500 + 305,025 + 320,276 = 915,801 2. Total estimated cost $4,026,000 Working Notes: Total units to be produced in three months = 640,000 units Raw material required for 640,000 units = 640,000 unit x 4 pound per unit =2,560,000 pounds of raw material Raw material to be used is 2,560,000 pounds of raw material Ending Raw materials = 25% x 2,560,000 = 640,000 pound Raw material required to be purchased = Ending + Used during the period - Beginning =640,000 + 2,560,000 - 760,000 =2,440,000 pounds Total estimated cost = Raw material required to be purchased x cost per pound =2,440,000 x $1.65 =4,026,000 Please feel free to ask if anything about above solution in comment section of the question.

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