For the following production estimates, what is the amount to be spent on buying raw material in July.
Estimated inventory (units), July 1: 8,500
Desired inventory (units), July 31: 10,500
Expected sales volume (units), July: 76,000
For each unit produced, the direct materials requirements are as follows:
Direct material A:($5 per unit): 3 pounds
Direct material B:($18 per pound): 1/2 pound
The total direct materials purchases of materials A and B (assuming no beginning or ending material inventory) required for July production is:
A. $1,800,000 for A; $648,000 for B
B. $1,080,000 for A; $1,296,000 for B
C. $1,170,000 for A; $702,000 for B
D. $1,125,000 for A; $675,000 for B
According to the production estimates for July, the company's inventory as on July 1 is 8500 units. It requires this to increase and the inventory to be 10500 units on July 31. This means that an excess 2000 units need to be manufactured in addition to the units that are sold. The sale for the month of July is 76000. So a total of 76000 + 2000 = 78000 units need to be produced.
Each unit requires 3 units of material A and half a pound of material B. Material A costs $5 per unit, so 3 units cost $15. As half a pound of material B is required $9 has to be spent here. There is no raw material in store and all of it has to be bought in July.
So the amount to be spent to buy material A is 78000*15 = $1170000. The amount to be spent to buy material B is 78000*9 = $702000
The correct amount to be spent for A is $1170000 and the amount to be spent for material B is $702000.