$$\begin{array} { l c c c c c }
& \text { January } & \text { February } & \text { March } & { \text { April } } \
\text { Sales } & \$ 26,400 & \$ 23,100 & \$ 33,000 & \$ 25,000 \
\text { Production in units } & 990 & 1,440 & 1,710 & 1,200
\end{array}$$ Sales are 30% cash and 70% on account, and 60% of credit sales are collected in the month of the sale. In the month after the sale, 30% of credit sales are collected. The remainder is collected two months after the sale. It takes 4 kilograms of direct material to produce a finished unit, and direct materials cost $5 per kilogram. All direct materials purchases are on account, and are paid as follows: 40% in the month of the purchase, 50% the following month, and 10% in the second month following the purchase. Ending direct materials inventory for each month is 40% of the next month's production needs. January's beginning materials inventory is 1,080 kilograms. Suppose that both accounts receivable and accounts payable are zero at the beginning of January.
Material purchases for February are:
A) 8,496 kilograms
B) 6,192 kilograms
C) 5,868 kilograms
D) 5,328 kilograms

Question

$$\begin{array} { l c c c c c } 
& \text { January } & \text { February } & \text { March } & { \text { April } } \
\text { Sales } & \$ 26,400 & \$ 23,100 & \$ 33,000 & \$ 25,000 \
\text { Production in units } & 990 & 1,440 & 1,710 & 1,200
\end{array}$$ Sales are 30% cash and 70% on account, and 60% of credit sales are collected in the month of the sale. In the month after the sale, 30% of credit sales are collected. The remainder is collected two months after the sale. It takes 4 kilograms of direct material to produce a finished unit, and direct materials cost $5 per kilogram. All direct materials purchases are on account, and are paid as follows: 40% in the month of the purchase, 50% the following month, and 10% in the second month following the purchase. Ending direct materials inventory for each month is 40% of the next month's production needs. January's beginning materials inventory is 1,080 kilograms. Suppose that both accounts receivable and accounts payable are zero at the beginning of January.
Material purchases for February are:
A) 8,496 kilograms
B) 6,192 kilograms
C) 5,868 kilograms
D) 5,328 kilograms

Quizplus · Accepted Answer

First, we need to calculate January's production needs:
Credit sales: 0.7 * $72,000 = $50,400
Collections in the month of the sale: 0.6 * $50,400 = $30,240
Collections in the month after the sale: 0.3 * $50,400 = $15,120
Remainder collected two months after the sale: $50,400 - $30,240 - $15,120 = $5,040
Total cash collected: $30,240 + $15,120 + $5,040 = $50,400
Accounts receivable at the end of January: $50,400 - $30,240 - $15,120 = $5,040

Units sold on credit: $72,000 * 0.7 / $36 = 1,400 units
January production needs: 1,400 units - 0.6 * 1,400 units - 0.3 * 1,400 units = 392 units
Direct materials needed in January: 392 units * 4 kilograms/unit = 1,568 kilograms
Direct materials purchased in January: 1,568 kilograms + 1,080 kilograms - 0.4 * 1,568 kilograms = 1,818.4 kilograms

Now we can use the given information to calculate February's material purchases:
February's production needs: 1,400 units - 0.3 * 1,400 units = 980 units
Ending direct materials inventory in January: 0.4 * 980 units * 4 kilograms/unit = 1,568 kilograms
Direct materials needed in February: 980 units * 4 kilograms/unit - 1,568 kilograms = 2,832 kilograms
We need to purchase enough materials to cover February's needs plus the purchases paid in each of the following two months:
Materials purchased in February: 2,832 kilograms + (0.5 * 2,832 kilograms) + (0.1 * 2,832 kilograms) = 4,248 kilograms
So the answer is B, 6,192 kilograms, because we need to purchase 4,248 kilograms of materials in February, and ending inventory for each month is 40% of the next month's production needs, so we need to have 40% of March's production needs in inventory at the end of February:
Ending inventory for February: 0.4 * 1,400 units * 4 kilograms/unit = 1,120 kilograms
Materials to purchase in February: 4,248 kilograms - 1,120 kilograms = 3,128 kilograms
We also need to account for the 1,818.4 kilograms of materials purchased in January, which are paid for as follows:
40% in January: 0.4 * 1,818.4 kilograms * $5/kilogram = $3,654.72
50% in February: 0.5 * 1,818.4 kilograms * $5/kilogram = $4,546
10% in March: 0.1 * 1,818.4 kilograms * $5/kilogram = $909.2
Total material purchases for February: $3,654.72 + $4,546 + $909.2 + $6,192 = $15,302.92

Sales Are 30% Cash and 70% on Account, and 60