Exercise 7-10 Production and Direct Materials Budgets [LO7-3, LO7-4]

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 17,200 units.

b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month's production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 108,000 cc of solvent H300.

c. The company maintains no work in process inventories.

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

Budgeted Sales

in Units July 71,000 August 76,000 September 86,000 October 66,000 November 56,000 December 46,000

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

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