San Fernando Fertilizer Company plans to sell 260,000 units of finished product

Question

San Fernando Fertilizer Company plans to sell 260,000 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 90 percent of the next month's estimated sales. There are 234,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of raw material at a cost of $1.95 per pound. There are 870,000 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. (Do not round intermediate calculations. Round your final answer to the nearest unit.)

2. Independent of your answer to requirement (1), assume the company plans to produce 800,000 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.

Explanation / Answer

Answer 1 Computation of the company's total required production in units of finished product for the entire three-month period ending September 30 July August September Sales units         260,000.00         273,000.00     286,650.00 Add : Ending Inventory         245,700.00         257,985.00       60,196.50 Add : Beginning Inventory         234,000.00         245,700.00     257,985.00 Total Required Production un units               271,700               285,285             88,862 Answer 2 Computation the total estimated cost of raw-material purchases for the entire three-month period ending September 30. 3 month ending September 30 Production Units 800000 x Raw material requirement per unit (in pounds) 4 Total Raw material requirement for Production (in pounds) 3200000 Add : Raw material Inventory as on Sep.30 (in pounds) 800000 Less : Raw material Inventory as on July 31 (in pounds) 870000 Tota Raw material purchases (in pounds) 3130000 x Raw material cost per pound $1.95 Total Estimated Cost of raw material Purchases $6,103,500.00

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