Scot Company plans to sell 400 000 units of finished product in July of 20x4. Ma

Question

Scot Company plans to sell 400 000 units of finished product in July of 20x4. Management
anticipates a growth rate in sales of 5 per cent per month. The desired monthly ending
inventory in units of finished product is 80 per cent of the next month's .estimated sales.
There are 300 000 finished units in the inventory on 30 June 20x4. Each unit of finished
product requires 4 kg of direct material at a cost of R1 ,50 per kg. There are 1 600 000 kg
of direct material in the inventory on 30 June 20x4.
Required:
2.1 Calculate Scot Company's production requirement in units of finished product for
the three-month period ending 30 September 20x4. (7)
2.2. Independent of your answer to Requirement 2.1, assume the company plans to
produce 1 200 000 units of finished product in the three-month period ending 30
September 20x4. The firm will have direct materials inventory at the end of the
three-month period equal to 25 per cent of the direct material used during that
period. Calculate the estimated cost of direct materials purchases for the three month
period ending 30 September 20x4. (4)

Explanation / Answer

2.1. COMPUTATION OF PRODUCTION REQUIREMENT FOR 3 MONTHS PARTICULARS JULY AUG SEP TOTAL OPENING STOCK 300000 336000 352800 SALES 400000 420000 441000 1261000 CLOSING STOCK - 80% of next month sales 336000 352800 370440 PRODUCTION - sales + closing stock - opening 436000 436800 458640 1331440 TOTAL PRODUCTION FOR 3 MONTHS = 1331440 TOTAL RAW MATERIAL REQUIRED = 1331440*4 5325760 LESS: OPENING RAW MATERIAL 1600000 RAW MATERIAL REQUIRED 3725760 2.2. COMPUTATION OF PRODUCTION REQUIREMENT FOR 3 MONTHS PRODUCTION PLAN FOR 3 MONTHS 1200000 OPENING STOCK 300000 NET PRODUCTION 900000 RAW MATERIAL REQUIRED 3600000 CLOSING RAW MATERIAL AS ON 30TH SEP 900000 RAW MATERIAL REQUIRED 2700000

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