Question 3:

1. Smith Ltd manufactures and sells one product. You are presented with the following information for the preparation of the annual operating budget for the period ending 31 December 2021:

• Estimated sales in units are 50,000 units for Quarter 1, 53,000 units for Quarter 2, 62,000 units for Quarter 3, and 65,000 units for Quarter 4. The estimated per unit selling price is $9 for Quarters 1-3, and $10 for Quarter 4.

• Smith Ltd has set the desired ending inventory of its product at 5% of the next quarters sales units. In quarter 4 of 2021 continuing into 2022, Smith Ltd aims to decrease this percentage to 2.5% of sales. It is expected that Smith Ltd will sell 60,000 units in Quarter 1 of 2022 and 65,000 units in Quarter 2 of 2022. The beginning inventory on 1 January 2021 is 3,000 units.

• Smith Ltd uses 2.5 kg of direct material per unit to produce its product. Smith Ltd has set the desired ending inventory of its direct material at 15% of the next quarters manufacturing needs. The beginning inventory on 1 January 2021 is 17,750 kg of direct material. Smith Ltd has secured a contract price with a supplier, in which the supplier will provide direct materials at a cost of $0.55 per kg over the next 18 months.

Tasks

Prepare the following budgets for the period ending 31 December 2021 (use whole numbers when rounding):

1. Sales budget.
2. Production budget.
3. Direct material purchases budget (use whole numbers when rounding).