earl 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 4,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 21,250 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 88,000 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	69,000
  August	74,000
  September	84,000
  October	64,000
  November	54,000
  December	44,000
Required:
1.
Prepare a production budget for Supermix for the months July, August, 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.


Answer : 1 Production Budget

Production Budget	July	August	September	October	November
Estimated Sales	69000	74000	84000	64000	54000
Add: Closing Finished goods inventory (4000+25%of 74000;84000;64000;54000;44000)	22500	25000	20000	17500	15000
Less: Opening Finished Goods Inventory	21250	22500	25000	20000	17500
Production Budget	70250	76500	79000	61500	51500
Answer : 2 Purchase Budget

Production	70250	76500	79000	61500	51500
Solvent required per unit of Supermix	3	3	3	3	3
Solvent Requirement	210750	229500	237000	184500	154500
Purchase Budget	July	August	September	October
Solvent Requirement	210750	229500	237000	184500
Add: Closing Raw material Inventory(1/2)*229500;237000;184500;154500	114750	118500	92250	77250
Less: Opening Raw material inventory	105375	114750	118500	92250
Solvent to be Purchased	220125	233250	210750	169500