Three grams of musk oil are required for each bottle of Mink Caress, a very popu

Question

Three grams of musk oil are required for each bottle of Mink Caress, a very popular perfume made by a small company in western Siberia. The cost of the musk oil is $1.50 per gram. Budgeted production of Mink Caress is given below by quarters for Year 2 and for the first quarter of Year 3 First Second ThirdFourth 60,000 90,000 150,000 100,000 Yewar3 First 70,000 Budgeted production, in bottles Musk oil has become so popular as a perfume ingredient that it has become necessary to carry large inventories as a precaution against stock-outs. For this reason, the inventory of musk oil at the end of a quarter must be equal to 20% of the following quarter's production needs. Some 36,000 grams of musk oil will be on hand to start the first quarter of Year 2

Explanation / Answer

Mink Caress Direct materials budget - Year 2 Quarter First Second Third Fourth Year Budgeted production                                         60,000                                         90,000                                      150,000                                      100,000                                              400,000 Units of raw material needed per unit of finished goods 3 gms 3 gms 3 gms 3 gms 3 gms Units of raw material needed to meet production 60,000*3 = 180,000 90,000*3 = 270,000 150,000*3 = 450,000 100,000*3 = 300,000 400,000*3 = 1,200,000 Add: Desired ending raw material inventory 270,000*20% = 54,000 450,000*20% = 90,000 300,000*20% = 60,000 70,000*3*20% = 42,000 70,000*3*20% = 42,000 Total units of raw materials needed                                      234,000                                      360,000                                      510,000                                      342,000                                          1,242,000 Less: Desired beginning raw material inventory                                         36,000 270,000*20% = 54,000 450,000*20% = 90,000 300,000*20% = 60,000                                                36,000 Units of raw materials to be purchased                                      198,000                                      306,000                                      420,000                                      282,000                                          1,206,000 Unit cost of raw materials $                                         1.50 $                                         1.50 $                                         1.50 $                                         1.50 $                                                 1.50 Cost of raw material to be purchased 198,000*$1.50 = $297,000 306,000*$1.50 = $459,000 420,000*$1.50 = $630,000 282,000*$1.50 = $423,000 1,206,000*$1.50 = $1,809,000

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