Accounting

Doyle Beverages manufactures its own soda pop bottes. The bottles are made from polyethylene terephthalate (PET), a lightweight yet strong plastic. The company uses as much PET recycled resin pellets in its bottles as it can, both because using recycled PET helps the company to meet its sustainability goals and because recycled PET is less expensive than virgin PET.

Doyle is contnuing to search for ways to reduce its costs and its impact on the environment. PET plas c is melted and blown over soda bottle molds to produce the bottles. One idea Doyles engineers have suggested is to retroroft the soda bottlee molds and change the plas c formula on slightly so that 25% less PET plastic is used for each bottle. The average kilograms of PET per soda bottle before any redesign is 0.004 kg. The cost of retrofftng the soda bo le molds will result a one- time charge of $3,086, while the plastic reformula on will cause the average cost per kilogram of PET plas c to change from $1.00 to $1.20.

Doyles management is analyzing whether the change to the bo le molds to reduce PET plastic usage should be made. Management expects the following number of soda bo les to be used in the upcoming year:

Number of bottles to be produced

Quarter 1 2,000,000

Quarter 2 2,500,000

Quarter 3 3,000,000

Quarter 4 3,100,000

For the upcoming year, management expects the beginning inventory of PET to be 800 kilograms, while ending inventory is expected to be 1,770 kilograms. During the first three quarters of the year, management wants to keep the ending inventory of PET at the end of each quarter equal to 10% of the following quarters PET needs.

Requirements:

Using the original data (before any redesign of soda bottles), prepare a direct materials budget

to calculate the cost of PET purchases in each quarter for the upcoming year and for the year in

total.

Assume that the company retroffts the soda bo le molds and changes the plas c formula on

slightly so that less PET plasticc is used in each bottle. Now prepare a direct materials budget to calculate the cost of PET purchases in each quarter for the upcoming year and for the year for this possible scenario.

Compare the cost of PET plastic for Requirement 1 (original data) and for Requirement 2 (making change to using less PET). What is the direct material cost savings from making the change to using less PET? Compare the total of those savings to the cost of retro ng the soda bo le molds. Should the company make the change? Explain your rationale.