Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company is now planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements:

(a)        The finished goods inventory on hand at the end of each month must be equal to 3,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 10,000 units

(b)        The raw materials inventory on hand at the end of each month must be equal to one-half of following month’s production needs for raw materials. The raw materials inventory of June 30 is budgeted to be 54,000 cc of solvent H300.

(c)        The company maintains no work in process inventories.

A sales budget for the Supermix for the last six months of the year follows

Required:

1.         Prepare a production budget for Supermix for the months July, August, September, and October.

2.         Examine the production budget that you prepared in (1) above. Why will the company produce more units than it sells in July and August, and fewer units than it sells in September and October?

3.         Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August and September, and for the quarter in total.

Transcribed Image Text:

Budgeted Sales in Units 35,000 July 40,000 August 50,000 September October 30,000 November 20,000 10,000 December