Stick With Us Company will begin operations next January to produce glue. Estimates of sales quantities and direct materials and direct labor costs are as follows:

Direct Materials and Direct Labor Costs Tubes to be Sold per Tube January 15,000 Direct materials February 25,000 (4 lbs @ $1.50 per Ib.) $6.00 March 20,000 Direct labor April 10,000 (1/4 hr.@$9.00 per hr.) DDS The following information is also available:

(a) Monthly production should be scheduled so that the ending inventory of finished tubes of glue is 50% of the next month’s expected sales of tubes.

(b) Direct materials inventory (in pounds) at the end of each month should be 25% of the next month’s usage requirement. Direct materials will be paid for in the month following their purchase, with no cash discounts. Assume Stick has no direct materials inventory on January I.

(c) Stick pays wages in the month the labor cost is incurred.

Required: (1) Prepare a production budget for January, February, and March.

(2) Prepare a direct materials purchases budget foi January and February.

(3) Prepare a direct labor budget for January and February.

(4) Do you think it is reasonable for this company to set desired finished goods inventory levels as a constant percentage of the next month’s expected sales, and desired direct materials inventory as a constant percentage of the next month’s usage requirement? What do you think are the advantages and disadvantages of this policy?